Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure

This paper investigates the existence of significant spillovers from the housing sector onto the wider economy for eight OECD countries in a six-variable structural vector autoregressive model (SVAR). A housing demand shock is identified through the recursive Choleski decompostion and, subsequently by using Uhlig’s (2005) agnostic identification procedure. The latter allows a housing demand shock to be identified by imposing sign restrictions on the impulse responses of consumer prices, residential investment, real house prices and mortgage loans, while private consumption and nominal interest rate responses are left unrestricted. The results suggest that consumption responds positively and significantly to a house price shock in Canada, France, Japan, Spain and, the UK. A significant positive delayed response of nominal interest rates follows a house price shock in Germany, Japan, the UK and, the US, suggesting that while central banks do not seem to respond instantly and systematically to a housing demand shock, its repercussions on the economy tend to translate into higher policy rates after a few quarters.