House Prices, Interest Rates and Macroeconomic Fluctuations: International Evidence Christopher Otrok and Marco E. Terrones


This paper studies the dynamic properties of international house prices, stock prices, interest rates and macroeconomic aggregates in industrial countries. While the dynamics of stock market returns and interest rates have been studied previously, we use a new dataset to gain insight into both the comovement of house price across industrial countries and the relationship between the fluctuations of house price with the fluctuations of financial asset returns and macroeconomic aggregates. Despite the fact that housing is the quintessential nontradable asset, we find a large degree of synchronization or comovement in the growth rate of real house prices in industrialized countries. We then show that much of this comovement can be related to a common dynamic component in interest rates across these countries. While we confirm the existence of a great degree of comovement in macroeconomic aggregates (namely, real output, consumption, and residential investment), we find little evidence that these aggregates are important sources of house price fluctuations. Instead, we find that house prices have an effect on macroeconomic aggregates. Given the important role that interest rates play for asset prices and macroeconomic fluctuations in industrial countries, we examine the role of monetary policy shocks--both domestic and global--in driving movement in these variables using an identified VAR augmented with our latent factors. We find evidence of a strong but delayed impact of U.S. monetary shocks on housing price growth both in the U.S. and internationally. We also document differences in the response of the U.S. economy and the global economy to these shocks.

rates. In this paper we contribute to the effort of bridging these two strands of literature and study the inter-relationships in the degree and nature of comovement across both macroeconomic aggregates and asset returns.2 Included in our list of asset returns is the growth rate of real residential house prices.

Housing activities account for a large fraction of GDP and households’ expenditures in industrial countries. Moreover, housing is the main asset5 and mortgage debt the main liability held by households in these countries, and therefore large house price movements, by affecting households’ net wealth and their capacity to borrow and spend may have important macroeconomic implications. From a global perspective, housing is the quintessential nontraded asset yet, as we document in this paper, there is a surprising degree of synchronization in the changes in the price of this asset across industrial countries. In fact, the degree of comovement is on par with the magnitude of comovement in both financial asset returns (essentially frictionless) and macroeconomic aggregates (slowed only by trade frictions).