The international transmission of house price shocks

Are there contagion effects? Olivier de Bandt (BdF)

Karim Barhoumi (BdF)

Catherine Bruneau (Paris X and BdF)

Transmission/contagion• Transmission: reaction of house prices to

fundamentals in « normal times », including all available information– Fundamentals are correlated– Arbitrage behaviour across markets smooth out

idiosyncracies

• Contagion: 2 definitions:– Amplitude of reaction differs in « crisis periods », with

possible non linearities– Pandemic model: « from local to global and global to

local »

Data

• House prices from OECD and national sources

• OECD quarterly national accounts : GDP, inflation, short and long term interest rates, housing investment

• 15 countries: AUS, CAN, CHE, FIN, FRA, DEU, IRE, ITA, JPN, NLD, NOR, NZL, ESP, UK, US

Methods

• Single linear equations to estimate the link between ‘local’ and ‘global’ levels, including house prices

• Linear Favar models and causality tests– to take into account endogeneity– But need to accomodate the high persistence

of variables

• Crisis dummies and STAR models to assess possible non linearities

Main Findings

• Contagion from US house prices, which appear to be exogenous

• Spreading to the rest of the world, according to the « pandemic view » of contagion : common house prices « Granger cause » domestic house prices in Favar models

Plan

I – A closer look at the data

II- Empirical results

III- Conclusion

l- A closer look at the data (1/4)Common SW’s house prices in OECD countries

I- A closer look at the data (2/4)Using a larger database : fac1 correlated with

interest rates

I- A closer look at the data (3/4)Using a larger database : fac2 correlated with GDP

growth)

I- A closer look at the data (4/4)Using a larger database : fac3 corr. with OGAP

II- Empirical results

• 1- single one period ahead equation with global house price factor

• 2- single one period ahead equation with crisis dummy

• 3-single one period ahead equation with other global factors

• 4- single non linear (LSTAR) with all global factors

• 5- causality tests in Favar models

1- Single one period ahead linear equations=> international housing factor is significant

in many countries: AUS, ESP, UK

2- robustness to Financial Crisis periods (Reinhart & Rogoff, 2008)

Tab2: Robustness to crisis periods

3- Tab3: Sensitiveness to global factors in single one period ahead equation

4-LSTAR models: contemporaneous impact of the threshold variable in the two regimes

5-Causality in favar models of reduced order: US house prices are exogeneous and affect Common house

prices

Causality in favar models of reduced order: Other domestic house

prices are affected by Common house prices

Causality from systems : Other domestic house prices are affected by

Common house prices

III-Conclusion

• Evidence in favour of international transmission

• Evidence in favour of « pandemic model » with contagion from USA to rest of countries