Is the Dutch housing market overvalued and, if so, to what degree? Are the home prices too steep in comparison to other economic data, such as interest rates and income? Can we expect a bubble to burst, causing a collapse of the market similar to what has happened in the United States of America?

After all, the Netherlands also experienced a long uninterrupted period of rising home prices, from 1985 until 2008. Between 1996 and 2001 prices even increased between 10 and 18% on an annual basis. This growth period came to an end in August of 2008. The annual dif-ference between 2008 and 2009 is according Statistics Netherlands (CBS) approxi-mately minus 3%. Whether further price drops can be expected in the near future depends especially on the question whether the current home prices are too high in relation to the relevant economic factors. To answer this question, I will present an error correction model. This model can measure a potential overvaluation, as well as make predictions concerning future home prices.

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