Time-frequency linkages of international housing markets and macroeconomic drivers

Purpose - The studies on international housing markets have not modeled frequency domain and focused only on the time domain. The purpose of the present research is to fill this gap by using the state-of-the-art econometric technique of wavelets to understand how differences in the horizon of analysis across time impact international housing markets’ relationship with some of the key macroeconomic variables. The purpose is to also analyze the direction of causation in the relationships. Design/methodology/approach - The author uses the novel time–frequency analysis of international housing markets’ linkages to the macroeconomic drivers. Unlike conventional approaches that do not distinguish between time and frequency domain, the author uses wavelets to study house prices’ relationship with its drivers in the time–frequency space. The novelty of the approach also allows gaining insights into the debates that deal with the direction of causation between house price changes and macroeconomic variables. Findings - Results show that the relationship between house prices and key macroeconomic indicators varies significantly across countries, time, frequencies and the direction of causation. House prices are most related to interest rates at the higher frequencies (short-run) and per capita income growth at the lower frequencies (long-run). The role of industrial production and income growth has switched over time at lower frequencies, particularly, in Finland, France, Sweden and Japan. The stock market’s nexus with the housing market is significant mainly at high to medium frequencies around the recent financial crisis. Research limitations/implications - The present research implies that in contrast to the existing approaches that are limited to the only time domain, the frequency considerations are equally, if not more, important. Practical implications - Results show that interested researchers and analysts of international housing markets need to account for the both horizon and time under consideration. Because the factors that drive high-frequency movements in housing market are very different from low-frequency movements. Furthermore, these roles vary over time. Social implications - The insights from the present study suggest policymakers interested in bringing social change in the housing markets need to account for the time–frequency dynamics found in this study. Originality/value - The paper is novel on at least two dimensions. First, to the best of the author’s knowledge, this study is the first to propose the use of a time–frequency approach in modeling international housing market dynamics. Second, unlike present studies, it is the first to uncover the direction of causation between house prices and economic variables for each frequency at every point of time.