Download This PDF is a selection from a published volume from... of Economic Research Volume Title: NBER International Seminar on Macroeconomics 2012

This PDF is a selection from a published volume from the National Bureau
of Economic Research
Volume Title: NBER International Seminar on Macroeconomics 2012
Volume Author/Editor: Francesco Giavazzi and Kenneth D. West,
organizers
Volume Publisher: University of Chicago Press
Volume ISBN: 978-0-226-05313-4 cloth; 978-0-226-05327-1 paper;
0-226-05327-X paper
Volume URL: http://www.nber.org/books/giav12-1
Conference Date: June 15-16, 2012
Publication Date: August 2013
Chapter Title: Comment on "Global House Price Fluctuations:
Synchronization and Determinants"
Chapter Author(s): Leonardo Melosi
Chapter URL: http://www.nber.org/chapters/c12773
Chapter pages in book: (p. 174 - 179)
Comment
Leonardo Melosi, Federal Reserve Bank of Chicago
I.
Main Comments
This very interesting paper addresses two questions: How synchronized
are housing cycles across countries? What are the main driving forces in
global and national house prices? The paper uses a panel data set that
includes quarterly series of GDP, house prices, equity prices, credit, and
the short- and long-term interest rates of 18 advanced OECD countries
for the period 1971:1 to 2011:3. While the paper finds that house prices
are synchronized across countries, the degree of synchronization is
lower than that of real GDP and much lower than the prices of alternative assets, such as equity. Finally, the paper analyzes the contribution
of some global shocks (i.e., monetary shocks, productivity shocks, credit
shocks, uncertainty shocks, etc.) to the synchronization of house prices
across countries. In this brief comment, I discuss the main contributions of the paper with strong emphasis on the new avenues for future
research that the paper opens.
Factors of segmentation for the world housing market. That house prices
have exhibited a degree of synchronization that has intensified in recent
years is not very surprising since a similar pattern has been widely documented for national incomes as well. What is important is that the paper finds that house prices are synchronized across countries less than
real GDP, and much less than the price of alternative investment goods,
such as equity. This finding suggests that the world housing market
is quite segmented. In future studies, it will be crucial to evaluate the
reasons for such a severe segmentation. There are several potential explanations: (a) the high transaction costs that characterize the housing
market compared to financial markets; (b) the many national laws that
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Comment
175
regulate this market in most countries (Goodman and Thibodeau 1998);
(c) the nature of houses themselves, which, for instance, requires lumpy
adjustments for households (Khan and Thomas 2009). A quantitative
investigation of these and other factors of segmentation for the housing market is very important, and hopefully this paper will encourage
researchers to work on this topic.
Factors of integration for local housing markets. Quite interestingly, the
paper sheds light on how country characteristics relate to the integration of the national housing market. To this end, the authors construct
a small database comprising the following variables: fraction of house
price variance explained by the global house price, capital inflows (as
percent of GDP), mortgages (as percent of GDP), ownership rate, and
population density. They estimate a panel regression with fixed-effects
and time-effects. The dependent variable is the fraction of house price
variance in each country explained by the global house price factor.
The regressors are capital inflows (as a proxy for the degree of financial
integration), mortgages, ownership rates, and population density (all
these variables, except for the last one, are in logs). Table 1 reports the
results of this exercise: the house price variance due to the global factor
is positively associated with the degree of financial integration.1
While this exercise only scratches the surface of understanding the
sources of synchronization in housing markets, it suggests that the integration of financial systems may have a nonneutral impact on the
degree of integration of national housing markets. For instance, an important factor of integration for housing markets might be the degree
of tightness of international banking linkages. I believe that this is an
important topic for future research, as data on international banking
linkages are available in the Bank for International Settlements (BIS)
Location Banking Statistics Database (Kalemli- Ozcan, Papaioannou,
and Perri 2012). Financial integration fosters international transmission
of country-specific financial shocks. Negative country-specific financial
shocks lead globally operating banks to pull out funds from the mortgage markets in all countries, causing house prices to become more synchronized across countries. This type of cross-border propagations of
national shocks might have raised the synchronization of house prices
since, in most countries, the banking system plays a prominent role in
the housing markets. For instance, mortgage debt is the main liability
of households in advanced economies. Furthermore, houses are widely
used as collateral to borrow from banks. It is important to note that
the effects of local shocks on the degree of synchronization of house
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N
R2
Adjusted R2
Constant
Population Density
Ownership rate (logs)
Mortgages as % of GDP (logs)
Capital Inflows as % of GDP (logs)
31
0.51
0.47
–0.27
[0.21]
0.28**
[0.10]
(1)
31
0.29
0.24
0.20
[0.86]
0.04
[0.22]
(2)
Table 1
Housing Project Fixed Effects and Time Effects Regressions
31
0.35
0.30
–1.50
[1.60]
0.47
[0.40]
(3)
31
0.42
0.37
–0.01**
[0.00]
2.02***
[0.61]
(4)
31
0.53
0.47
0.24
[0.85]
0.31**
[0.12]
–0.15
[0.26]
(5)
31
0.52
0.46
–1.05
[1.09]
0.21
[0.28]
0.26**
[0.09]
(6)
31
0.60
0.55
–0.01***
[0.00]
1.20**
[0.44]
0.26***
[0.08]
(7)
31
0.55
0.48
–0.89
[1.38]
0.29**
[0.11]
–0.22
[0.25]
0.36
[0.32]
(8)
31
0.61
0.55
–0.01***
[0.00]
1.61
[1.03]
0.29***
[0.10]
–0.14
[0.24]
(9)
31
0.64
0.57
0.27***
[0.09]
–0.21
[0.23]
0.38*
[0.21]
–0.01***
[0.00]
0.44
[1.26]
(10)
Comment
177
prices depend on the nature of the shocks themselves. For example,
country-specific productivity shocks may reduce the synchronization
as they change the relative profitability of financial investments across
countries.
Cross-country correlations of common factors. The paper also reports the
cross-country correlations of the common factors in table 8. Two important facts emerge. First, the common factor of house prices is highly
correlated with the factors of credit and output for the full sample. Second, the correlations between the common factor of house prices and
the factors of credit and output have declined over time. These two
results deserve further attention in future research. The first result suggests that global liquidity and credit plays an important role for the
synchronization of house prices across countries. Although the correlation falls in the second half of the sample, it still remains quite large. A
visual inspection of figure 2 confirms this finding: the dynamic of the
common factor of house prices closely resembles that of credit across all
the samples. Furthermore, the reduction in the correlation between the
common factor of house prices and that of credit might be due to the
rapid acceleration of financial innovation in recent years. In this light,
it would be interesting to assess the robustness of this finding when a
broader definition of credit is used. Alternatively, country-specific reforms or other structural changes affecting some countries more than
others (e.g., changes of the national mortgage markets, bank regulation,
etc.) may have weakened the link between global credit and the common factor of house prices in the last 25 years.
What are the effects of the recent global recession on the synchronization of
house prices? The authors have also evaluated the synchronization of
house prices for a subsample called the Great Moderation that ranges
from 1985:1 to 2007:4. A separate investigation of this period is particularly important because of the unprecedented rapid boost in world
trade volume and financial linkages that, as discussed earlier, might
have influenced the synchronization of house prices. The observations
from 2008:1 to 2011:3 are included in the globalization period and are
characterized by a drastic contraction of world trade volume and by
major turmoils in the international financial system. Quite interestingly, the findings regarding the synchronization of the house prices
are mainly unchanged between the Great Moderation period and the
globalization period, suggesting that the recent events might not have
had significant effects on the degree of international synchronization of
house prices.
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178
Melosi
The role of global shocks. Authors identify a number of global shocks
(i.e., monetary shocks, credit shocks, productivity shocks, and uncertainty shocks) using a recursive (i.e., Cholesky) scheme and sign restriction à la Uhlig (2005). Global shocks are shocks that contemporaneously affect the common factors of the observable variables (i.e., house
prices, GDP, equity prices, short-term interest rates, etc.). The response
of house prices and other variables to these shocks is found to be either
not statistically significant or not very robust across the two identification schemes. The response of house prices to global uncertainty shocks
is found to be statistically significant and robust during the globalization period, which ranges from 1985:1 to 2011:3.
My concern with the introduction of the concept of global shocks is
that these shocks may not be really structural since they might also capture (at least in part) the cross-border endogenous propagation of local
disturbances.
What are the macroeconomic implications of the world housing market integration for the propagation of local shocks? A paper investigating the propagation mechanisms of local shocks to the house prices across countries would be pathbreaking. Providing an answer to this question is
very important given the strong implications of the house prices for the
macroeconomic stability (e.g., Iacoviello and Neri 2010; Liu, Wang, and
Zha 2011). Therefore, understanding the propagation of local shocks to
macroeconomic aggregates and their spillover to other foreign countries should be a top priority for macroeconomists. For instance, we
need to develop models to answer questions such as, how much is a
financial shock in the United States expected to depress the housing
market and output in the United Kingdom? Does a more integrated
housing market help the national monetary authorities to achieve the
goal of macroeconomic stability?
II.
Concluding Remarks
I find this paper very stimulating, as it raises several important research
questions. First, why are house prices less synchronized across countries than incomes and prices of alternative investment goods, such
as equity? Second, what is the role of financial integration, including
the integration of national banking systems, for the synchronization
of house prices? Third, why has the cross-country correlation between
the common factor of house prices and that of credit fallen in the last
thirty years? Fourth, what are the macroeconomic implications of the
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Comment
179
world housing market integration for the propagation of local shocks
and hence for macroeconomic stability? I expect that this paper will
stimulate the study of these new promising venues for future research.
Finally, I have discussed my concerns about interpreting the global
shocks identified in the paper as structural. They are likely to capture
the cross-border propagation of local shocks.
Endnotes
Prepared for the ISOM–NBER Conference, Oslo, Norway, June 15–16, 2012. The views
in this paper are solely the responsibility of the author and should not be interpreted as
reflecting the views of the Federal Reserve Bank of Chicago or any other person associated with the Federal Reserve System. For acknowledgments, sources of research support, and disclosure of the author’s material financial relationships, if any, please see
http: // www.nber.org / chapters / c12773.ack.
1. This table has been gently provided by the authors. Standard errors are reported
within square brackets. ***, **, * denote whether the estimated value for the parameters
are statistically significantly different from zero at 1%, 5%, and 10% levels, respectively.
References
Goodman, A. C., and T. G. Thibodeau. 1998. “Housing Market Segmentation.”
Journal of Housing Economics 7 (2): 121–43.
Iacoviello, M., and S. Neri. 2010. “Housing Market Spillovers: Evidence from
an Estimated DSGE Model.” American Economic Journal: Macroeconomics 2 (2):
125–64.
Kalemli-Ozcan, S., E. Papaioannou, and F. Perri. 2012. “Global Banks and Crisis
Transmission.” NBER Working Paper no. 18209. Cambridge, MA: National
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Khan, A., and J. Thomas. 2009. “Endogenous Market Segmentation and the
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Liu, Z., P. Wang, and T. Zha. 2011. “Land-Price Dynamics and Macroeconomic
Fluctuations.” NBER Working Paper no. 17045. Cambridge, MA: National
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Uhlig, H. 2005. “What Are the Effects of Monetary Policy on Output? Results
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