Working Paper: NBER ID: w17751
Authors: Jack Favilukis; David Kohn; Sydney C. Ludvigson; Stijn van Nieuwerburgh
Abstract: The last fifteen years have been marked by a dramatic boom-bust cycle in real estate prices, accompanied by economically large fluctuations in international capital flows. We argue that changes in international capital flows played, at most, a small role in driving house price movements in this episode and that, instead, the key causal factor was a financial market liberalization and its subsequent reversal. Using observations on credit standards, capital flows, and interest rates, we find that a bank survey measure of credit supply, by itself, explains 53 percent of the quarterly variation in house price growth in the U.S. over the period 1992-2010, while it explains 66 percent over the period since 2000. By contrast, once we control for credit supply, various measures of capital flows, real interest rates, and aggregate activity--collectively--add less than 5% to the fraction of variation explained for these same movements in home values. Credit supply retains its strong marginal explanatory power for house price movements over the period 2002-2010 in a panel of international data, while capital flows have no explanatory power.
Keywords: International Capital Flows; House Prices; Financial Market Liberalization
JEL Codes: F20; F32; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Market Liberalization (FML) (F30) | House Price Movements (R31) |
| Credit Supply (E51) | House Price Growth (R31) |
| Capital Flows and Real Interest Rates (F32) | House Price Movements (R31) |
| Changes in Net Foreign Asset Holdings and Capital Inflows (F32) | House Prices (R31) |