Housing Market Volatility in the OECD Area: Evidence from VAR Based Return Decompositions

31 Pages Posted: 1 Mar 2013 Last revised: 3 Sep 2014

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Thomas Quistgaard Pedersen

Aarhus University - CREATES

Date Written: July 31, 2014

Abstract

Vector-autoregressive models are used to decompose housing returns in 18 OECD countries into cash ‡ow (rent) news and discount rate (return) news over the period 1970-2011. For the majority of countries news about future returns is the main driver, and both real interest rates and risk-premia play an important role in accounting for housing market volatility. Bivariate cross-country correlations and principal components analyses indicate that part of the return movements have a common factor among the majority of countries. We explain the results in terms of global changes in credit constraints and transactions costs as well as changes in monetary policy over this period. Among other things, our results shed new light on whether excessively low interest rates by the monetary authorities was a major cause for the housing boom up to 2006.

Keywords: Housing return, OECD countries, risk-premia, monetary policy

JEL Classification: C32, G12, R31

Suggested Citation

Engsted, Tom and Pedersen, Thomas Quistgaard, Housing Market Volatility in the OECD Area: Evidence from VAR Based Return Decompositions (July 31, 2014). Journal of Macroeconomics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2226332 or http://dx.doi.org/10.2139/ssrn.2226332

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Thomas Quistgaard Pedersen

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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