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How Housing Slumps End

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  • Kevin Hjortshøj O'Rourke
  • Augustin S. Benetrix and Barry Eichengreen

Abstract

We construct a simple probit model of the determinants of real house price slump endings.� We find that the probability of a house price slump ending is higher, the smaller was the pre-slump house price run-up; the greater has been the cumualtive house price decline; the lower are real mortgage interest rates; and the higher is GDP growth.� Slumps are longer, other things being equal, where housing supply is more elastic, but shorter the more developed are financial institutions.� For slumps of a given size, shorter sharper slumps are associated with worse macroeconomic performance in the short run, but with better performance in the long run.� This suggests that for sufficiently low discount rates, policy makers should not impede the decline in real house prices, and this conclusion is reinforced by the finding that after a certain duration, house price slumps can become self-reinforcing.� On the other hand, we also find evidence that during downturns, falling house prices can lead to lower private sector credit flows.� Policy makers thus face a delicate balancing act.� While they should not intervene to artifically prop up overvalued house prices, they should ensure that their macroeconomic and banking policies are such as to make a bottoming-out more likely.� This suggests that they should keep real interest rates low, and ensure that banks are well-capitalised.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 577.

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Date of creation: 01 Oct 2011
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Handle: RePEc:oxf:wpaper:577

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Keywords: House prices; Slumps; Probit; VAR;

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Cited by:
  1. Duffy, David & Durkan, Joe & Casey, Eddie, 2012. "Quarterly Economic Commentary, Summer 2012," Forecasting Report, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), number QEC20122, March.
  2. Duffy, David & Durkan, Joe & O'Sullivan, Cormac, 2012. "Quarterly Economic Commentary, Winter 2011/Spring 2012," Forecasting Report, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), number QEC20121, March.
  3. Duffy, David & FitzGerald, John, 2012. "The Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), vol. 2012(2-Summer).
  4. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
  5. Bracke, Philippe, 2013. "How long do housing cycles last? A duration analysis for 19 OECD countries," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(3), pages 213-230.
  6. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
  7. Douglas Sutherland & Peter Hoeller, 2014. "Growth Policies and Macroeconomic Stability," OECD Economic Policy Papers 8, OECD Publishing.

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