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International Capital Flows and House Prices: Theory and Evidence

In: Housing and the Financial Crisis

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

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 chapter was published in:
  • Edward L. Glaeser & Todd Sinai, 2013. "Housing and the Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number glae11-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12626.
    Handle: RePEc:nbr:nberch:12626
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Gete, Pedro, 2015. "Housing markets and current account dynamics," Globalization and Monetary Policy Institute Working Paper 221, Federal Reserve Bank of Dallas.
    2. Andrea Ferrero, 2011. "House Prices Booms and Current Account Deficits," 2011 Meeting Papers 1386, Society for Economic Dynamics.
    3. Klaus Adam & Pei Kuang & Albert Marcet, 2011. "House Price Booms and the Current Account," CEP Discussion Papers dp1064, Centre for Economic Performance, LSE.
    4. Joshua Aizenman & Yothin Jinjarak, 2008. "Current Account Patterns and National Real Estate Markets," NBER Working Papers 13921, National Bureau of Economic Research, Inc.
    5. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2012. "Can Cheap Credit Explain the Housing Boom?," NBER Chapters, in: Housing and the Financial Crisis, pages 301-359 National Bureau of Economic Research, Inc.
    6. Acharya, Viral V & Schnabl, Philipp & Suarez, Gustavo, 2012. "Securitization Without Risk Transfer," CEPR Discussion Papers 8769, C.E.P.R. Discussion Papers.
    7. Laibson, David I. & Mollerstrom, Johanna Britta, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Scholarly Articles 4686766, Harvard University Department of Economics.
    8. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
    9. 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.
    10. Maddaloni, Angela & Peydró, José-Luis, 2010. "Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards," Working Paper Series 1248, European Central Bank.
    11. 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.
    12. 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, pages 143-204 National Bureau of Economic Research, Inc.
    13. 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.
    14. 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.
    15. Favara, Giovanni & Imbs, Jean, 2010. "Credit Supply and the Price of Housing," CEPR Discussion Papers 8129, C.E.P.R. Discussion Papers.
    16. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
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