Buying a house or an apartment is for most people the largest expenditure of their life, so it comes as no surprise that real estate prices have profound impact on a family budget and on performance of whole economies. However, the qualitative and quantitative nature of this impact is still not as well understood as the link between financial assets such as stocks and bonds and the economy.

Moreover, the dynamics of property prices has not been scrutinized to the extent stock prices have been. First, the issue of identifying a potential bubble is addressed. In many countries around the world (including some in the European Union), the real estate prices seem dangerously high; bursting of a bubble can severely reduce consumption and output of any given economy.

New methodology is able to identify patterns, which often accompany overpriced real estate. This methodology is discussed and applied to Czech data, where the (potential) bubble can be a result of joining the European Union. Existence of a bubble is incompatible with most rational asset pricing models. Hence, a dynamic econometric model is studied, which keeps certain bubble-like features but can be easily used as a building block for a life-cycle model.

This model is extended to include returns on financial assets and consumption. The generalized model is then capable of characterizing the current state(s) of the economy and should be able to distinguish potentially different driving economic forces behind the three variables. The model will be employed to analyze the Czech economy and will also consider the United States as a benchmark.

Finally, the proposed econometric model will become a part of the life-cycle model with risky labour income. This model is designed to quantify the impact of fluctuations in property prices on consumption, and consequently on welfare of households. The model has a general appeal and can be used to evaluate various scenarios regarding developments on the housing market.