Explosive Dynamics in House Prices? An Exploration of Financial Market Spillovers in Housing Markets Around the World

33 Pages Posted: 9 Aug 2018 Last revised: 29 Apr 2020

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: July, 2018

Abstract

Asset prices in general, and real house prices in particular, are often characterized by a nonlinear data-generating process which displays mildly explosive behavior in some periods. Here, we investigate the emergence of explosiveness in the dynamics of real house prices and the role played by asset market spillovers. We establish a timeline of periodically-collapsing episodes of explosiveness for a panel of 23 countries from the Federal Reserve Bank of Dallas? International House Price Database (Mack and Martnez-Garca (2011)) between first quarter 1975 and fourth quarter 2015 using the recursive unit root test methodology proposed by Phillips et al. (2015a,b). Motivated by the theory of financial arbitrage, we examine within a dynamic panel logit/probit framework whether macro fundamentals?and, more specifically, financial variables?help predict episodes of explosiveness in real house prices. We find that interest rate spreads and real stock market growth together with standard macro variables (growth in personal disposable income per capita and inflation) are amongst the best predictors. We, therefore, argue that financial developments in other asset markets play a significant role in the emergence of explosiveness in housing markets.

JEL Classification: C22, G12, R30, R31

Suggested Citation

Martinez-Garcia, Enrique and Grossman, Valerie, Explosive Dynamics in House Prices? An Exploration of Financial Market Spillovers in Housing Markets Around the World (July, 2018). Globalization and Monetary Policy Institute Working Paper No. 342, Available at SSRN: https://ssrn.com/abstract=3228456 or http://dx.doi.org/10.24149/gwp342r1

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
245
PlumX Metrics