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International Capital Flows and House Prices: Theory and Evidence

In: Housing and the Financial Crisis

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  • Jack Favilukis
  • David Kohn
  • Sydney C. Ludvigson
  • Stijn Van Nieuwerburgh

Abstract

The last fifteen years have been marked by a dramatic boom-bust cycle in real estate prices, accompanied by economically large fluctuations in international capital flows. We argue that changes in international capital flows played, at most, a small role in driving house price movements in this episode and that, instead, the key causal factor was a financial market liberalization and its subsequent reversal. Using observations on credit standards, capital flows, and interest rates, we find that a bank survey measure of credit supply, by itself, explains 53 percent of the quarterly variation in house price growth in the U.S. over the period 1992-2010, while it explains 66 percent over the period since 2000. By contrast, once we control for credit supply, various measures of capital flows, real interest rates, and aggregate activity—collectively—add less than 5% to the fraction of variation explained for these same movements in home values. Credit supply retains its strong marginal explanatory power for house price movements over the period 2002-2010 in a panel of international data, while capital flows have no explanatory power.

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This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12626.

Handle: RePEc:nbr:nberch:12626

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  1. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
  2. Klaus Adam & Pei Kuang & Albert Marcet, 2011. "House Price Booms and the Current Account," NBER Working Papers 17224, National Bureau of Economic Research, Inc.
  3. Andrea Ferrero, 2011. "House Prices Booms and Current Account Deficits," 2011 Meeting Papers 1386, Society for Economic Dynamics.
  4. David Laibson & Johanna Mollerstrom, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Economic Journal, Royal Economic Society, vol. 120(544), pages 354-374, 05.
  5. Angela Maddaloni, 2011. "Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2121-2165.
  6. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2010. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium," NBER Working Papers 15988, National Bureau of Economic Research, Inc.
  7. Jean Imbs & Giovanni Favara, 2011. "Credit Supply and the Price of Housing," 2011 Meeting Papers 1342, Society for Economic Dynamics.
  8. Aizenman, Joshua & Jinjarak, Yothin, 2008. "Current account patterns and national real estate markets," Santa Cruz Department of Economics, Working Paper Series qt1rh4s127, Department of Economics, UC Santa Cruz.
  9. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, in: Housing and the Financial Crisis National Bureau of Economic Research, Inc.
  10. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2012. "Can Cheap Credit Explain the Housing Boom?," NBER Chapters, in: Housing and the Financial Crisis National Bureau of Economic Research, Inc.
  11. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2012. "Credit Supply and House Prices: Evidence from Mortgage Market Segmentation," NBER Working Papers 17832, National Bureau of Economic Research, Inc.
  12. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 197-219, November.
  13. Gete, Pedro, 2009. "Housing Markets and Current Account Dynamics," MPRA Paper 20957, University Library of Munich, Germany, revised 24 Feb 2010.
  14. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
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Cited by:
  1. Carolina Arteaga & Carlos Huertas Campos & Sergio Olarte Armenta, 2012. "Índice de Desbalance Macroeconómico," BORRADORES DE ECONOMIA 010077, BANCO DE LA REPÚBLICA.
  2. Peter Tillmann, 2012. "Capital Inflows and Asset Prices: Evidence from Emerging Asia," MAGKS Papers on Economics 201215, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Stijn Van Nieuwerburgh, 2012. "The Research Agenda: Stijn Van Nieuwerburgh on Housing and the Macroeconomy," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 13(2), April.

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