The international transmission of house price shocks Are there contagion effects? Olivier de Bandt (BdF) Karim Barhoumi (BdF) Catherine Bruneau (Paris X and BdF)

Transmission/contagion Transmission: reaction of house prices to fundamentals in « normal times », including all available information –Fundamentals are correlated –Arbitrage behaviour across markets smooth out idiosyncracies Contagion: 2 definitions: –Amplitude of reaction differs in « crisis periods », with possible non linearities –Pandemic model: « from local to global and global to local »

Data House prices from OECD and national sources OECD quarterly national accounts : GDP, inflation, short and long term interest rates, housing investment 15 countries: AUS, CAN, CHE, FIN, FRA, DEU, IRE, ITA, JPN, NLD, NOR, NZL, ESP, UK, US

Methods Single linear equations to estimate the link between ‘local’ and ‘global’ levels, including house prices Linear Favar models and causality tests – to take into account endogeneity –But need to accomodate the high persistence of variables Crisis dummies and STAR models to assess possible non linearities

Main Findings Contagion from US house prices, which appear to be exogenous Spreading to the rest of the world, according to the « pandemic view » of contagion : common house prices « Granger cause » domestic house prices in Favar models

Plan I – A closer look at the data II- Empirical results III- Conclusion

l- A closer look at the data (1/4) Common SW’s house prices in OECD countries

I- A closer look at the data (2/4) Using a larger database : fac1 correlated with interest rates

I- A closer look at the data (3/4) Using a larger database : fac2 correlated with GDP growth)

I- A closer look at the data (4/4) Using a larger database : fac3 corr. with OGAP

II- Empirical results 1- single one period ahead equation with global house price factor 2- single one period ahead equation with crisis dummy 3-single one period ahead equation with other global factors 4- single non linear (LSTAR) with all global factors 5- causality tests in Favar models

1- Single one period ahead linear equations => international housing factor is significant in many countries: AUS, ESP, UK

2- robustness to Financial Crisis periods (Reinhart & Rogoff, 2008)

Tab2: Robustness to crisis periods

3- Tab3: Sensitiveness to global factors in single one period ahead equation

4-LSTAR models: contemporaneous impact of the threshold variable in the two regimes

5-Causality in favar models of reduced order: US house prices are exogeneous and affect Common house prices

Causality in favar models of reduced order: Other domestic house prices are affected by Common house prices

Causality from systems : Other domestic house prices are affected by Common house prices

III-Conclusion Evidence in favour of international transmission Evidence in favour of « pandemic model » with contagion from USA to rest of countries