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The changing role of house price dynamics over the business cycle

  • Dufrénot, G.
  • Malik, S.

In this paper, we attempt to analyse the relationship between house price developments and the business cycle. Employing a time-varying transition probability Markov switching framework, we provide empirical evidence that house price growth may prove a useful leading indicator for turning point detection. In focusing on three countries, the US, UK and Spain, we furthermore provide evidence that although potentially informative from an overall perspective in business cycle modelling, the signi.cance of signals contained in house prices may not be symmetric across the identi.ed high growth and low growth states. In addition, we suggest a possible range of values for house price de.ation which may trigger a recession the following period.

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Paper provided by Banque de France in its series Working papers with number 309.

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Length: 22 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:309
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/

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  1. Sichel, Daniel E, 1993. "Business Cycle Asymmetry: A Deeper Look," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 224-36, April.
  2. Clements, Michael P & Krolzig, Hans-Martin, 2003. "Business Cycle Asymmetries: Characterization and Testing Based on Markov-Switching Autoregressions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 196-211, January.
  3. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  4. Charles Goodhart & Boris Hofmann, 2008. "House prices, money, credit, and the�macroeconomy," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 180-205, spring.
  5. Carlos Vargas-Silva, 2007. "Monetary policy and the U.S. housing market: A VAR analysis imposing sign restrictions," Working Papers 0705, Sam Houston State University, Department of Economics and International Business.
  6. Patrick Honohan, 2008. "Discussion of 'Financial innovation and European housing and mortgage markets', by David Miles and Vladimir Pillonca," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 176-179, spring.
  7. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  8. Frederic S. Mishkin, 2007. "Housing and the Monetary Transmission Mechanism," NBER Working Papers 13518, National Bureau of Economic Research, Inc.
  9. Miguel Almunia & Agustín S. Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2009. "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons," The Institute for International Integration Studies Discussion Paper Series iiisdp303, IIIS.
  10. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 149-233.
  11. McQueen, Grant & Thorley, Steven, 1993. "Asymmetric business cycle turning points," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 341-362, June.
  12. Ceron, Jose A. & Suarez, Javier, 2006. "Hot and Cold Housing Markets: International Evidence," CEPR Discussion Papers 5411, C.E.P.R. Discussion Papers.
  13. Filardo, Andrew J. & Gordon, Stephen F., 1998. "Business cycle durations," Journal of Econometrics, Elsevier, vol. 85(1), pages 99-123, July.
  14. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  15. John Muellbauer & Anthony Murphy, 2008. "Housing markets and the economy: the assessment," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 1-33, spring.
  16. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  17. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  18. Charles Engel & Craig S. Hakkio, 1994. "The Distribution of Exchange Rates in the EMS," NBER Working Papers 4834, National Bureau of Economic Research, Inc.
  19. Layton, Allan P. & Smith, Daniel R., 2007. "Business cycle dynamics with duration dependence and leading indicators," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 855-875, December.
  20. Kiefer, Nicholas M, 1980. "A Note on Regime Classification in Disequilibrium Models," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 637-39, April.
  21. Helmut Wagner, 2010. "The causes of the recent financial crisis and the role of central banks in avoiding the next one," International Economics and Economic Policy, Springer, vol. 7(1), pages 63-82, May.
  22. Nils Jannsen, 2010. "National and International Business Cycle Effects of Housing Crises," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(2), pages 175-206.
  23. Natalia T. Tamirisa & Alain N. Kabundi & Deniz Igan & Francisco Nadal-De Simone & Marcelo Pinheiro, 2009. "Three Cycles; Housing, Credit, and Real Activity," IMF Working Papers 09/231, International Monetary Fund.
  24. Phillips, Kerk L., 1991. "A two-country model of stochastic output with changes in regime," Journal of International Economics, Elsevier, vol. 31(1-2), pages 121-142, August.
  25. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  26. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  27. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  28. Luis J. Álvarez & Alberto Cabrero, 2010. "Does housing really lead the business cycle?," Banco de Espa�a Working Papers 1024, Banco de Espa�a.
  29. Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
  30. de Bandt, O. & Barhoumi, K. & Bruneau, C., 2010. "The international transmission of house price shocks," Working papers 274, Banque de France.
  31. Kiefer, Nicholas M, 1978. "Discrete Parameter Variation: Efficient Estimation of a Switching Regression Model," Econometrica, Econometric Society, vol. 46(2), pages 427-34, March.
  32. David Miles & Vladimir Pillonca, 2008. "Financial innovation and European housing and mortgage markets," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 145-175, spring.
  33. Ferrara, L. & Vigna, O., 2009. "Cyclical relationships between GDP and housing market in France: Facts and factors at play," Working papers 268, Banque de France.
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