Residential Investment and Economic Activity: Evidence from the Past Five Decades

29 Pages Posted: 11 Jun 2018

See all articles by Emanuel Kohlscheen

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Aaron N. Mehrotra

Bank for International Settlements (BIS)

Dubravko Mihaljek

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: June 6, 2018

Abstract

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

Suggested Citation

Kohlscheen, Emanuel and Mehrotra, Aaron N. and Mihaljek, Dubravko, Residential Investment and Economic Activity: Evidence from the Past Five Decades (June 6, 2018). BIS Working Paper No. 726. Available at SSRN: https://ssrn.com/abstract=3192758

Emanuel Kohlscheen (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Aaron N. Mehrotra

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Dubravko Mihaljek

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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