How Housing Slumps End
AbstractWe 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 InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 577.
Date of creation: 01 Oct 2011
Date of revision:
House prices; Slumps; Probit; VAR;
Other versions of this item:
- Agustin Benetrix & Barry Eichengreen & Kevin H. O'Rourke, 2011. "How Housing Slumps End," The Institute for International Integration Studies Discussion Paper Series iiisdp384, IIIS.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-CBA-2011-11-01 (Central Banking)
- NEP-MAC-2011-11-01 (Macroeconomics)
- NEP-URE-2011-11-01 (Urban & Real Estate Economics)
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