The International Transmission of House Price Shocks

In order to assess transmission mechanisms between global and domestic house prices, and possibly contagion effects, we use a large database of macroeconomic variables for OECD countries. We extract common factors to summarize the comovements of the variables and include them in stationary FAVAR models. We mainly focus on the "pandemic" view of contagion where local shocks, originating from a country or a local housing market, spread out to other domestic housing markets. An interesting finding is that, even allowing for other channels of international transmission (through global interest rates, or activity), the US real house prices, which appear to be exogenous in the US dynamics, unidirectionally causes the international house price factor, which in turn causes the domestic real house price growth for several countries. The channels of contagion from the US appears therefore to be either direct, through house prices (in particular in the UK or Spain), or indirect through other variables.