Abstract
Rising housing prices are accompanied by higher household consumption and firm investment that boost economic growth. However, excessive house price appreciations may distort capital allocation efficiency, for example by crowding out investments in productive sectors, which reduce long-term economic growth. Moreover, house price bubbles are typically unsustainable. Once a housing bubble bursts, credit conditions will tighten due to falling collateral value, leading to a fall in household consumption and employment that cause an economic downturn. Meanwhile, the correction of housing prices may improve investment efficiency and trigger structural reform that subsequently enhances economic growth. We look into the trade-off between the aforementioned effects at different stages of housing cycles and economic growth. Using a quarterly dataset that covers cross-country house prices over four decades, we find that house price appreciations are positively associated with economic growth, while the relationship between house price depreciations and economic growth is highly non-linear, depending on country-specific characteristics. In the absence of confounding crisis in the financial sector, short-lived large house price depreciations, rather than prolonged and modest ones, are positively associated with economic growth. The association between house price depreciations and economic growth is subject to legal systems, mortgage insurance, and personal bankruptcy law.
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Notes
The data is available from http://www.economist.com/blogs/dailychart/2011/11/global-house-prices. The original data covers 21 countries, Singapore and China are excluded from the final sample due to the lack of quarterly data on trade and inflation in International Financial Statistics.
It is calculated as [17%*2.07*6 + 11%*(5.06–2.07) *5]/100 = 3.76%, where 2.07 is the estimated coefficient of HPR and 5.06 is the estimated coefficient of |HPR|*DHPR < m in Table 3. The difference between 5.06 and 2.07 measures the relation between large depreciations and economic growth. More precise calculations that simulate the growth of housing prices and its cumulative association with growth yield similar results. For example, the compounded cumulative return is (1 + 17%*2.07/100)6*(1 + 11%*(5.06–2.07)/100)5–1 = 3.82%.
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Aizenman, J., Jinjarak, Y. & Zheng, H. Housing Bubbles, Economic Growth, and Institutions. Open Econ Rev 30, 655–674 (2019). https://doi.org/10.1007/s11079-019-09535-9
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DOI: https://doi.org/10.1007/s11079-019-09535-9