The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada

56 Pages Posted: 19 Nov 2018

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Xiaoqing Zhou

Bank of Canada

Multiple version iconThere are 3 versions of this paper

Date Written: October 22, 2018

Abstract

Shocks to the demand for housing that originate in one region may seem important only for that regional housing market. We provide evidence that such shocks can also affect housing markets in other regions. Our analysis focuses on the response of Canadian housing markets to oil price shocks. Oil price shocks constitute an important source of exogenous regional variation in income in Canada because oil production is highly geographically concentrated. We document that, at the national level, real oil price shocks account for 11% of the variability in real house price growth over time. At the regional level, we find that unexpected increases in the real price of oil raise housing demand and real house prices not only in oil-producing regions, but also in other regions. We develop a theoretical model of the propagation of real oil price shocks across regions that helps understand this finding. The model differentiates between oil-producing and non-oil-producing regions and incorporates multiple sectors, trade between provinces, government redistribution, and consumer spending on fuel. We empirically confirm the model prediction that oil price shocks are propagated to housing markets in non-oil-producing regions by the government redistribution of oil revenue and by increased interprovincial trade.

Keywords: House price; regional heterogeneity; oil price; redistribution; resource boom; regional propagation, Canada

JEL Classification: F43, Q33, Q43, R12, R31

Suggested Citation

Kilian, Lutz and Zhou, Xiaoqing, The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada (October 22, 2018). CFS Working Paper, No. 606, 2018. Available at SSRN: https://ssrn.com/abstract=3274347

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Xiaoqing Zhou

Bank of Canada ( email )

234 Wellington Street
Ottawa, ON K1A 0G9
Canada

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