The Changing Role of House Price Dynamics Over the Business Cycle

Abstract

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 significance of signals contained in house prices may not be symmetric across the identified high growth and low growth states. In addition, we suggest a possible range of values for house price deflation which may trigger a recession the following period.

Keywords: Business cycles, leading indicators, housing, Markov switching

JEL Classification: C11, C32, G15, R31, E32