Residential Investment and Economic Activity: Evidence from the Past Five Decades
29 Pages Posted: 11 Jun 2018
Date Written: June 6, 2018
We analyse the evolution and main drivers of residential investment, using a panel with quarterly data for 15 advanced economies since the 1970s. Residential investment is a notably volatile component of real GDP in all countries in the sample. We find real house price growth, net migration inflows and the size of the existing housing stock to be significant drivers of residential investment across various model specifications. We also detect important asymmetries: interest rate increases affect residential investment more than interest rate cuts, and interest rate changes have larger effects on residential investment when its share in overall GDP is rising. Finally, we show that adding information on residential investment significantly improves the performance of standard recession prediction models.
Keywords: housing markets, residential investment, house prices, business cycles, construction, interest rates, recession forecasts
JEL Classification: E22, E32, E37, E43, E52, F44
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