Foreign Demand and Local House Prices: Evidence from the US

32 Pages Posted: 24 Apr 2020

See all articles by Anil Ari

Anil Ari

International Monetary Fund

Damien Puy

International Monetary Fund (IMF)

Yu Shi

International Monetary Fund (IMF)

Date Written: February 2020

Abstract

We test whether foreign demand matters for local house prices in the US using an identification strategy based on the existence of 'home bias abroad' in international real estate markets. Following an extreme political crisis event abroad, a proxy for a strong and exogenous shift in foreign demand, we show that house prices rise disproportionately more in neighbourhoods with a high concentration of population originating from the crisis country. This effect is strong, persistent, and robust to the exclusion of major cities. We also show that areas that were already expensive in the late 1990s have experienced the strongest foreign demand shocks and the biggest drop in affordability between 2000 and 2017. Our findings suggest a non-trivial causal effect of foreign demand shocks on local house prices over the last 20 years, especially in neighbourhoods that were already rather unaffordable for the median household.

Keywords: Economic conditions, Real estate prices, Housing prices, Business cycles, Demand, House Prices, Housing Affordability, Political Risk, Capital Flows., WP, local house price, foreign demand, house price, affordability, foreign-born population

JEL Classification: F20, G15, R31, E01, F3, E2, E66, R3

Suggested Citation

Ari, Anil and Puy, Damien and Shi, Yu, Foreign Demand and Local House Prices: Evidence from the US (February 2020). IMF Working Paper No. 20/43, Available at SSRN: https://ssrn.com/abstract=3583405

Anil Ari

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/anlari/

Damien Puy (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yu Shi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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