The Link between Output, Inflation,
Monetary Policy and Housing Price
Dynamics
June 2009
Markus Demary, Research Center for Real Estate Economics, demary@iwkoeln.de
1
The Link between House Prices and Key
Macroeconomic Aggregates
 A large fraction of households‘ net worth is invested in housing
 Housing has the important part of being collateral for mortgage financing
 A large fraction of private liabilities are mortgage loans
 Changes in house prices change households‘ wealth and thereby households‘
consumption expenditures
 Changes in house prices change households‘ borrowing constraints
 Monetary policy moves translate to mortgage market rate changes
 Housing demand may change during the business cycle
 Housing might be a hedge against inflation
Markus Demary, "Housing Price Dynamics", June 2009
2
How Do House Prices and Macroeconomic Aggregates
Interact?
 Behavior at business cycle frequencies
 How large is the volatility of the house price cycle?
 How persistent are house price cycles?
 Do they lead or lag the business cycle?
 The interplay between house prices and macro variables
 How do GDP, inflation and interest rates move house prices?
 How do house prices move GDP, inflation and interest rates?
 What are the relevant transmission channels?
Markus Demary, "Housing Price Dynamics", June 2009
3
Data and Methodology
 Used Dataset
 OECD dataset on real house prices, real GDP, GDP-deflator, money market rates
 spannig the period 1970Q1 to 2005Q4, also used in several studies
 Methodology 1: Hodrick-Prescott-filtered cyclical components
 Volatilities, Autocorrelations and Cross-Correlations
 Methodology 2: Vector-Autoregressions for the levels of the data series
 Expected future time development after shock
 Contribution of shocks
 Assumption 1: time lag of inflation response to GDP
 Assumption 2: time lag in inflation and GDP response to interest rates
 Assumption 3: monetary policy reacts to inflation and GDP without a lag
 Assumption 4: house prices react without a lag
Markus Demary, "Housing Price Dynamics", June 2009
4
House Prices Have the Most Volatile Cycle
Volatilities at Business Cycle Frequencies
Price Level
GDP
Interest Rate
House Prices
Australia
0,017
0,013
0,019
0,042
Denmark
0,011
0,014
0,016
0,057
Finland
0,019
0,021
0,016
0,070
France
0,010
0,009
0,015
0,155
Germany
0,007
0,018
0,016
0,018
Japan
0,017
0,014
0,016
0,044
Netherlands
0,010
0,013
0,017
0,059
Spain
0,014
0,011
0,019
0,053
UK
0,023
0,015
0,018
0,069
USA
0,009
0,016
0,017
0,021
Markus Demary, "Housing Price Dynamics", June 2009
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House Prices Have the Most Persistent Cycle
Autocorrelations at Business Cycle Frequencies
Price Level
GDP
Interest Rate
House Prices
Australia
0,827
0,714
0,736
0,884
Denmark
0,864
0,805
0,878
0,899
Finland
0,867
0,905
0,717
0,952
France
0,901
0,853
0,813
0,974
Germany
0,800
0,619
0,878
0,925
Japan
0,902
0,805
0,835
0,942
Netherlands
0,818
0,541
0,744
0,945
Spain
0,875
0,825
0,516
0,915
UK
0,896
0,806
0,801
0,941
USA
0,933
0,870
0,784
0,912
Markus Demary, "Housing Price Dynamics", June 2009
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Business Cycle Comovements
Correlations between House Prices and ...
GDP (-2 Quarter)
GDP
GDP (+2 Quarter)
Australia
0,381
0,485
0,340
Denmark
0,447
0,633
0,657
Finland
0,719
0,797
0,703
France
0,112
0,060
0,031
Germany
0,038
0,317
0,156
Japan
0,674
0,605
0,306
Netherlands
0,187
0,329
0,349
Spain
0,510
0,512
0,388
UK
0,660
0,616
0,341
USA
0,648
0,660
0,532
Markus Demary, "Housing Price Dynamics", June 2009
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House Prices Move with GDP
Impulse Responses to an Inflationary Shock ...
Australia
Denmark
Finland
France
Germany
Japan
Netherlands
Spain
UK
USA
Price Level
GDP
House Prices
Interest Rates
+
+
+
+
+
+
+
+
+
+
+
+
-
+
+
-
+
+
+
+
+
+
+
Markus Demary, "Housing Price Dynamics", June 2009
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Aggregate Demand Pushes House Prices
Impulse Responses to an Output Shock ...
Australia
Denmark
Finland
France
Germany
Japan
Netherlands
Spain
UK
USA
GDP
Price Level
House Prices
Interest Rates
+
+
+
+
+
+
+
+
+
+
+
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+
+
+
+
+
+
+
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+
+
+
+
+
+
+
+
+
+
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+
+
Markus Demary, "Housing Price Dynamics", June 2009
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House Prices Decline When Policy Tightens
Impulse Responses to an Interest Rate Shock ...
Australia
Denmark
Finland
France
Germany
Japan
Netherlands
Spain
UK
USA
Interest Rates
House Prices
GDP
Price Level
+
+
+
+
+
+
+
+
+
+
+
-
-
+
+
+
+
+
+
+
+
+
Markus Demary, "Housing Price Dynamics", June 2009
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The House Price Shock Pushes Aggregate Demand
Impulse Responses to a House Price Shock ...
Australia
Denmark
Finland
France
Germany
Japan
Netherlands
Spain
UK
USA
House Prices
GDP
Price Level
Interest Rates
+
+
+
+
+
+
+
+
+
+
+
+
0
+
+
0
+
-
+
+
+
+
+
+
+
+
+
+
+
+
+
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+
+
Markus Demary, "Housing Price Dynamics", June 2009
11
Interest Rates Drive House Price Fluctuations
Contribution of Shocks to ... to House Price Fluctuations
Price Level
Output
Interest Rate
House Prices
Australia
0,39%
12,24%
9,43%
77,94%
Denmark
1,20%
12,94%
2,12%
83,74%
Finland
0,67%
13,88%
2,05%
83,40%
France
0,25%
0,25%
18,74%
80,76%
Germany
2,32%
3,15%
0,15%
94,38%
Japan
27,89%
0,99%
21,65%
49,48%
Netherlands
0,04%
2,08%
17,21%
80,67%
Spain
2,34%
0,25%
1,66%
95,75%
UK
6,08%
6,72%
12,76%
74,43%
USA
32,84%
0,22%
24,18%
42,75%
Markus Demary, "Housing Price Dynamics", June 2009
12
House Prices Drive Interest Rate Fluctuations
Contribution of House Price Fluctuations to ...
Price Level
Output
Interest Rate
Australia
14,25%
1,66%
19,94%
Denmark
0,37%
12,79%
24,71%
Finland
4,61%
14,98%
13,62%
France
4,41%
0,02%
5,65%
Germany
10,48%
2,36%
18,04%
Japan
19,38%
2,37%
40,24%
Netherlands
0,04%
0,04%
6,66%
Spain
0,23%
19,87%
14,61%
UK
0,57%
1,22%
25,66%
USA
13,22%
13,22%
11,74%
Markus Demary, "Housing Price Dynamics", June 2009
13
Conclusion and Outlook
 Empirical assessment of the link between house price fluctuations and key
macroeconomic aggregates
 Empirical evidence that GDP and interest rates are a key macro driver of house
prices
 Empirical evidence that house price changes translate to changes in aggregate
demand
 House prices might be an indicator for future inflationary pressures and future
recessions
 Central banks might put weight on monitoring house prices
Markus Demary, "Housing Price Dynamics", June 2009
14
Thank You for Your Attention
Markus Demary, "Housing Price Dynamics", June 2009
15