1 The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics June 2009 Markus Demary, Research Center for Real Estate Economics, [email protected]

1

The Link between Output, Inflation, The Link between Output, Inflation, Monetary Policy and Housing Price Monetary Policy and Housing Price DynamicsDynamicsJune 2009June 2009

Markus Demary, Research Center for Real Estate Economics, [email protected] Demary, Research Center for Real Estate Economics, [email protected]

Markus Demary, "Housing Price Dynamics", June 2009 2

The Link between House Prices and Key The Link between House Prices and Key Macroeconomic AggregatesMacroeconomic Aggregates A large fraction of households‘ net worth is invested in housingA large fraction of households‘ net worth is invested in housing

Housing has the important part of being collateral for mortgage financingHousing has the important part of being collateral for mortgage financing

A large fraction of private liabilities are mortgage loansA large fraction of private liabilities are mortgage loans

Changes in house prices change households‘ wealth and thereby households‘ Changes in house prices change households‘ wealth and thereby households‘ consumption expendituresconsumption expenditures

Changes in house prices change households‘ borrowing constraintsChanges in house prices change households‘ borrowing constraints

Monetary policy moves translate to mortgage market rate changesMonetary policy moves translate to mortgage market rate changes

Housing demand may change during the business cycleHousing demand may change during the business cycle

Housing might be a hedge against inflationHousing might be a hedge against inflation


How Do House Prices and Macroeconomic Aggregates How Do House Prices and Macroeconomic Aggregates Interact? Interact? Behavior at business cycle frequenciesBehavior at business cycle frequencies

How large is the volatility of the house price cycle?How large is the volatility of the house price cycle?

How persistent are house price cycles?How persistent are house price cycles?

Do they lead or lag the business cycle?Do they lead or lag the business cycle?

The interplay between house prices and macro variablesThe interplay between house prices and macro variables

How do GDP, inflation and interest rates move house prices?How do GDP, inflation and interest rates move house prices?

How do house prices move GDP, inflation and interest rates?How do house prices move GDP, inflation and interest rates?

What are the relevant transmission channels?What are the relevant transmission channels?


Data and MethodologyData and Methodology Used DatasetUsed Dataset

OECD dataset on real house prices, real GDP, GDP-deflator, money market ratesOECD dataset on real house prices, real GDP, GDP-deflator, money market rates

spannig the period 1970Q1 to 2005Q4, also used in several studiesspannig the period 1970Q1 to 2005Q4, also used in several studies

Methodology 1: Hodrick-Prescott-filtered cyclical componentsMethodology 1: Hodrick-Prescott-filtered cyclical components

Volatilities, Autocorrelations and Cross-CorrelationsVolatilities, Autocorrelations and Cross-Correlations

Methodology 2: Vector-Autoregressions for the levels of the data seriesMethodology 2: Vector-Autoregressions for the levels of the data series

Expected future time development after shockExpected future time development after shock

Contribution of shocksContribution of shocks

Assumption 1: time lag of inflation response to GDPAssumption 1: time lag of inflation response to GDP

Assumption 2: time lag in inflation and GDP response to interest ratesAssumption 2: time lag in inflation and GDP response to interest rates

Assumption 3: monetary policy reacts to inflation and GDP without a lagAssumption 3: monetary policy reacts to inflation and GDP without a lag

Assumption 4: house prices react without a lagAssumption 4: house prices react without a lag


House Prices Have the Most Volatile CycleHouse Prices Have the Most Volatile CycleVolatilities at Business Cycle FrequenciesVolatilities at Business Cycle Frequencies

Price LevelPrice Level GDPGDP Interest RateInterest Rate House PricesHouse Prices

AustraliaAustralia 0,0170,017 0,0130,013 0,0190,019 0,0420,042

DenmarkDenmark 0,0110,011 0,0140,014 0,0160,016 0,0570,057

FinlandFinland 0,0190,019 0,0210,021 0,0160,016 0,0700,070

FranceFrance 0,0100,010 0,0090,009 0,0150,015 0,1550,155

GermanyGermany 0,0070,007 0,0180,018 0,0160,016 0,0180,018

JapanJapan 0,0170,017 0,0140,014 0,0160,016 0,0440,044

NetherlandsNetherlands 0,0100,010 0,0130,013 0,0170,017 0,0590,059

SpainSpain 0,0140,014 0,0110,011 0,0190,019 0,0530,053

UKUK 0,0230,023 0,0150,015 0,0180,018 0,0690,069

USAUSA 0,0090,009 0,0160,016 0,0170,017 0,0210,021


House Prices Have the Most Persistent CycleHouse Prices Have the Most Persistent CycleAutocorrelations at Business Cycle FrequenciesAutocorrelations at Business Cycle Frequencies

Price LevelPrice Level GDPGDP Interest RateInterest Rate House PricesHouse Prices

AustraliaAustralia 0,8270,827 0,7140,714 0,7360,736 0,8840,884

DenmarkDenmark 0,8640,864 0,8050,805 0,8780,878 0,8990,899

FinlandFinland 0,8670,867 0,9050,905 0,7170,717 0,9520,952

FranceFrance 0,9010,901 0,8530,853 0,8130,813 0,9740,974

GermanyGermany 0,8000,800 0,6190,619 0,8780,878 0,9250,925

JapanJapan 0,9020,902 0,8050,805 0,8350,835 0,9420,942

NetherlandsNetherlands 0,8180,818 0,5410,541 0,7440,744 0,9450,945

SpainSpain 0,8750,875 0,8250,825 0,5160,516 0,9150,915

UKUK 0,8960,896 0,8060,806 0,8010,801 0,9410,941

USAUSA 0,9330,933 0,8700,870 0,7840,784 0,9120,912


Business Cycle ComovementsBusiness Cycle ComovementsCorrelations between House Prices and ...Correlations between House Prices and ...

GDP (-2 Quarter)GDP (-2 Quarter) GDPGDP GDP (+2 Quarter)GDP (+2 Quarter)

AustraliaAustralia 0,3810,381 0,4850,485 0,3400,340

DenmarkDenmark 0,4470,447 0,6330,633 0,6570,657

FinlandFinland 0,7190,719 0,7970,797 0,7030,703

FranceFrance 0,1120,112 0,0600,060 0,0310,031

GermanyGermany 0,0380,038 0,3170,317 0,1560,156

JapanJapan 0,6740,674 0,6050,605 0,3060,306

NetherlandsNetherlands 0,1870,187 0,3290,329 0,3490,349

SpainSpain 0,5100,510 0,5120,512 0,3880,388

UKUK 0,6600,660 0,6160,616 0,3410,341

USAUSA 0,6480,648 0,6600,660 0,5320,532


House Prices Move with GDPHouse Prices Move with GDPImpulse Responses to an Inflationary Shock ...Impulse Responses to an Inflationary Shock ...

Price LevelPrice Level GDPGDP House PricesHouse Prices Interest RatesInterest Rates

AustraliaAustralia ++ -- -- ++ DenmarkDenmark ++ ++ ++ -- FinlandFinland ++ -- -- ++ FranceFrance ++ -- -- ++ GermanyGermany ++ -- -- -- JapanJapan ++ -- -- -- NetherlandsNetherlands ++ -- -- ++ SpainSpain ++ ++ ++ ++ UKUK ++ -- -- ++ USAUSA ++ -- -- ++


Aggregate Demand Pushes House PricesAggregate Demand Pushes House PricesImpulse Responses to an Output Shock ...Impulse Responses to an Output Shock ...

GDPGDP Price LevelPrice Level House PricesHouse Prices Interest RatesInterest Rates

AustraliaAustralia ++ ++ ++ -- DenmarkDenmark ++ ++ ++ -- FinlandFinland ++ ++ ++ ++ FranceFrance ++ ++ -- ++ GermanyGermany ++ ++ ++ ++ JapanJapan ++ ++ ++ ++ NetherlandsNetherlands ++ ++ ++ -- SpainSpain ++ ++ ++ -- UKUK ++ ++ ++ -- USAUSA ++ ++ ++ ++


House Prices Decline When Policy Tightens House Prices Decline When Policy Tightens Impulse Responses to an Interest Rate Shock ...Impulse Responses to an Interest Rate Shock ...

Interest RatesInterest Rates House PricesHouse Prices GDPGDP Price LevelPrice Level

AustraliaAustralia ++ -- -- ++ DenmarkDenmark ++ -- -- -- FinlandFinland ++ -- -- ++ FranceFrance ++ -- -- ++ GermanyGermany ++ ++ -- ++ JapanJapan ++ -- -- ++ NetherlandsNetherlands ++ -- -- ++ SpainSpain ++ -- -- ++ UKUK ++ -- -- ++ USAUSA ++ -- -- ++


The House Price Shock Pushes Aggregate DemandThe House Price Shock Pushes Aggregate DemandImpulse Responses to a House Price Shock ...Impulse Responses to a House Price Shock ...

House PricesHouse Prices GDPGDP Price LevelPrice Level Interest RatesInterest Rates

AustraliaAustralia ++ -- ++ ++ DenmarkDenmark ++ ++ ++ -- FinlandFinland ++ ++ ++ ++ FranceFrance ++ 00 ++ ++ GermanyGermany ++ ++ ++ ++ JapanJapan ++ ++ ++ ++ NetherlandsNetherlands ++ 00 ++ -- SpainSpain ++ ++ ++ ++ UKUK ++ -- ++ ++ USAUSA ++ -- ++ ++


Interest Rates Drive House Price FluctuationsInterest Rates Drive House Price FluctuationsContribution of Shocks to ... to House Price FluctuationsContribution of Shocks to ... to House Price Fluctuations

Price LevelPrice Level OutputOutput Interest RateInterest Rate House PricesHouse Prices

AustraliaAustralia 0,39%0,39% 12,24%12,24% 9,43%9,43% 77,94%77,94%

DenmarkDenmark 1,20%1,20% 12,94%12,94% 2,12%2,12% 83,74%83,74%

FinlandFinland 0,67%0,67% 13,88%13,88% 2,05%2,05% 83,40%83,40%

FranceFrance 0,25%0,25% 0,25%0,25% 18,74%18,74% 80,76%80,76%

GermanyGermany 2,32%2,32% 3,15%3,15% 0,15%0,15% 94,38%94,38%

JapanJapan 27,89%27,89% 0,99%0,99% 21,65%21,65% 49,48%49,48%

NetherlandsNetherlands 0,04%0,04% 2,08%2,08% 17,21%17,21% 80,67%80,67%

SpainSpain 2,34%2,34% 0,25%0,25% 1,66%1,66% 95,75%95,75%

UKUK 6,08%6,08% 6,72%6,72% 12,76%12,76% 74,43%74,43%

USAUSA 32,84%32,84% 0,22%0,22% 24,18%24,18% 42,75%42,75%


House Prices Drive Interest Rate FluctuationsHouse Prices Drive Interest Rate FluctuationsContribution of House Price Fluctuations to ...Contribution of House Price Fluctuations to ...

Price LevelPrice Level OutputOutput Interest RateInterest Rate

AustraliaAustralia 14,25%14,25% 1,66%1,66% 19,94%19,94%

DenmarkDenmark 0,37%0,37% 12,79%12,79% 24,71%24,71%

FinlandFinland 4,61%4,61% 14,98%14,98% 13,62%13,62%

FranceFrance 4,41%4,41% 0,02%0,02% 5,65%5,65%

GermanyGermany 10,48%10,48% 2,36%2,36% 18,04%18,04%

JapanJapan 19,38%19,38% 2,37%2,37% 40,24%40,24%

NetherlandsNetherlands 0,04%0,04% 0,04%0,04% 6,66%6,66%

SpainSpain 0,23%0,23% 19,87%19,87% 14,61%14,61%

UKUK 0,57%0,57% 1,22%1,22% 25,66%25,66%

USAUSA 13,22%13,22% 13,22%13,22% 11,74%11,74%


Conclusion and OutlookConclusion and Outlook

Empirical assessment of the link between house price fluctuations and key Empirical assessment of the link between house price fluctuations and key macroeconomic aggregatesmacroeconomic aggregates

Empirical evidence that GDP and interest rates are a key macro driver of house Empirical evidence that GDP and interest rates are a key macro driver of house pricesprices

Empirical evidence that house price changes translate to changes in aggregate Empirical evidence that house price changes translate to changes in aggregate demanddemand

House prices might be an indicator for future inflationary pressures and future House prices might be an indicator for future inflationary pressures and future recessionsrecessions

Central banks might put weight on monitoring house pricesCentral banks might put weight on monitoring house prices


Thank You for Your AttentionThank You for Your Attention

Documents

1 The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics June 2009 Markus Demary, Research Center for Real Estate Economics, [email protected]