A recent IMF working paper entitled Global House Price Fluctuations: Synchronization and Determinants (pdf) attempts to look for the reasons behind global linkages in house prices.
Of interest is their conclusions (handily in the summary)--"Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not . . ."
And yet these graphs comparing growth rates (annual?) appear on page 39 (not next to each other)
Of interest is their conclusions (handily in the summary)--"Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not . . ."
And yet these graphs comparing growth rates (annual?) appear on page 39 (not next to each other)
The two curves are practically identical. So it would seem that change in house prices is strongly controlled by changes in available credit.
Isn't this tied to monetary policy?
Monetary policy is supposed to work by changing interest rates. If you account for how changes in interest rates affect house prices and then try to use monetary policy to explain the residual (after accounting for interest rates), there is probably no effect left.
ReplyDeleteThis is technically true, but not insightful. Some idiot probably realized they couldn't run a regression with two highly correlated variables and decided to leave in interest rates instead of monetary policy.
RE: Why Credit and House Price Graphs Correlate So Well:
ReplyDeleteIMF Paper: Of interest is their conclusions (handily in the summary)--"Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not . . ."
I love Mikeyman's sarcasm:
"And yet these graphs comparing growth rates (annual?) appear on page 39 (not next to each other)"
The why:
The new credit in the graph is usually formed (extinguished) at the same time the house is transacted for a higher(lower) price.
The credit is % change in debt after it is deflated for prices. The % house price change is % change of real price.[1]
The seller pays off their mortgage and the buyer takes up a new one at the transfer sale. If the leverage ratio is kept. And, if it was sold for more then the price increased and there is a net increase in mortgage credit.
I find this interesting because: This paper's correlation is longer and probably higher than one Prof. Keen reports about. Prof. Steve Keen has lots of graphs about this but he divides by GDP. His correlations are best from 1990 and are above .8 range. I also have long run correlations with the credit cycle.
Keen has been asking, which leads the other and by how much? I was able to measure a lead of very little time (3 months or 3 quarters, I forget.). But, in looking at my explanation this might be simultaneous.
This might be clear to people with accounting knowledge, people in the finance, or trading of financed objects. But, I am not sure about all economists.
1. Appendix I: Database, p. 28 of paper.
House Prices Real house prices; 1971:1-2011:3
Credit Nominal credit deflated using consumer price index; 1971:1-2011:3 ect. ect. ect.
Professor Steve Keen has a collections of graphs of this correlation for many countries.
ReplyDeletehttp://www.profstevekeen.com/data-on-credit-employment-and-house-prices/#Canada