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Do house price developments spill over across euro area countries? Evidence from a Global VAR

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  • Hiebert, Paul
  • Vansteenkiste, Isabel

Abstract

This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. The application involves a Global VAR for three housing demand variables (real house prices, real per capita disposable income, and the real interest rate) on the basis of quarterly data for 10 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy, the Netherlands, Austria, Portugal and Finland) over the period 1989-2007. The results suggest limited house price spillovers in the euro area, with evidence of some overshooting in the first 1-3 years after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country's economic weight. This contrasts with the impacts of a shock to domestic long- term interest rates, with the latter causing a permanent shift in house prices after around 3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for economic weight in the euro area in governing their general magnitude, while geographic proximity appears to also play a role. JEL Classification: R21, R31, C32

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1026.

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Date of creation: Mar 2009
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Handle: RePEc:ecb:ecbwps:20091026

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Keywords: Global VAR (GVAR); house price; international linkages;

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  1. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-1, International Conferences on Panel Data.
  2. Vladimir Klyuev, 2008. "What Goes Up Must Come Down? House Price Dynamics in the United States," IMF Working Papers 08/187, International Monetary Fund.
  3. Holly, S. & Pesaran, M.H. & Yamagata. T., 2006. "A Spatio-Temporal Model of House Prices in the US," Cambridge Working Papers in Economics 0654, Faculty of Economics, University of Cambridge.
  4. Vansteenkiste, Isabel, 2007. "Regional housing market spillovers in the US: lessons from regional divergences in a common monetary policy setting," Working Paper Series 0708, European Central Bank.
  5. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  6. Dées, Stéphane & di Mauro, Filippo & Pesaran, Hashem & Smith, Vanessa, 2005. "Exploring the international linkages of the euro area: a global VAR analysis," Working Paper Series 0568, European Central Bank.
  7. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  8. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  9. McQuinn, Kieran & O' Reilly, Gerard, 2007. "A Model of Cross-Country House Prices (228.91 KB PDF)," Research Technical Papers 5/RT/07, Central Bank of Ireland.
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Cited by:
  1. Eickmeier, Sandra & Ng, Tim, 2011. "How Do Credit Supply Shocks Propagate Internationally? A GVAR approach," CEPR Discussion Papers 8720, C.E.P.R. Discussion Papers.
  2. Christophe André & Rangan Gupta & Patrick T. Kanda, 2012. "Do House Prices Impact Consumption and Interest Rate?: Evidence from OECD Countries Using an Agnostic Identification Procedure," OECD Economics Department Working Papers 947, OECD Publishing.
  3. Cesa-Bianchi, Ambrogio, 2013. "Housing cycles and macroeconomic fluctuations: A global perspective," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 215-238.
  4. Christophe Andre & Luis A. Gil-Alana & Rangan Gupta, 2013. "Comovement in Euro Area Housing Prices: A Fractional Cointegration Approach," Working Papers 201359, University of Pretoria, Department of Economics.
  5. Kajuth, Florian & Knetsch, Thomas A. & Pinkwart, Nicolas, 2013. "Assessing house prices in Germany: Evidence from an estimated stock-flow model using regional data," Discussion Papers 46/2013, Deutsche Bundesbank, Research Centre.
  6. Vittorio Peretti & Rangan Gupta & Roula Inglesi-Lotz, 2012. "Do House Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201216, University of Pretoria, Department of Economics.
  7. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.

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