Common Business and Housing Market Cycles in the Euro Area from a Multivariate Decomposition

Abstract

The 2007 sub-prime crisis in the United States, prolonged by a severe economic recession spread over many countries around the world, has led many economic researchers to focus on the recent fluctuations in housing prices and their relationships with macroeconomics and monetary policies. The existence of common housing cycles among the countries of the euro zone could lead the European Central Bank to integrate more specifically the evolution of such asset prices in its assessment. In this paper, we implement a multivariate unobserved component model on housing market variables in order to assess the common euro area housing cycle and to evaluate its relationship with the economic cycle. Among the general class of multivariate unobserved component models, we implement the band-pass filter based on the trend plus cycle decomposition model and we allow the existence of two cycles of different periods. The dataset consists of gross domestic product and real house prices series for four main euro area countries (Germany, France, Italy and Spain). Empirical results show a strong relationship for business cycles in France, Italy and Spain. Moreover, French and Spanish house prices cycles appear to be strongly related, while the German one possesses its own dynamics. Finally, we find that GDP and house prices cycles are related in the medium-term for fluctuations between 4 and 8 years, while the housing market contributes to the long-term economic growth only in Spain and Germany.

Comovement in Euro area housing prices: A fractional cointegration approach

“…In particular, the link between housing prices in Belgium and the Netherlands found in VH is consistent with our finding of a strong cointegration relationship between these countries. The same holds for France and Spain, whose synchronisation in housing cycles is also documented in Ferrara and Koopman (2010).…”

Has the euro sustainably increased home price co‐movement?

“…Alvarez et al (2010) examine the same four nations-France, Germany, Italy, and Spain-with data from 1980 to 2008. These authors employ a number of measures, such as correlation and concordance indices, and find similar to Ferrara and Koopman (2010) that GDP is highly synchronized across countries but that this is not the case for housing. They then go on to investigate specifically whether the advent of the euro has led to an increase in comovement for output and home values.…”

“…Accordingly, a number of papers have been written on international house price co‐movement in the eurozone. Alvarez, Bulligan, Cabrero, Ferrara, and Stahl (), Ferrara and Koopman (), Van Steenkiste and Hiebert () and Gupta, Andre, and Gil‐Arana () all examine the interaction of house prices between eurozone countries.…”

Housing and the business cycle in South Africa

“…Besides this, there exists a couple of other studies that have looked into the effect of real house prices on per capita economic growth at the provincial-level in South Africa using 1 See for instance, Leamer (2007), Fisher (2007), (Silos, 2007), Goodhart and Hofmann (2008), , Álvarez et al, (2010), Bulligan (2010), Bandt et al, (2010), Ferrara and Koopman (2010), , Ferrara and Vigna (2010), Ghent and Owyang (2010), Iacoviello (2010), Iacoviello and Neri (2010), Iacoviello and Pavan (forthcoming), Kiyotaki et al, (2011), Cinquegrana (2012, Kydland et al, (2012),. Note, however, there also exists a few studies, such as: Benhabib et al (1991), Greenwood and Hercowitz (1991), McGrattan, et al, (1997), Gomme et al (2001), Davis and Heathcote (2005), Iacoviello (2002Iacoviello ( , 2005 which had also emphasized the role of housing on business cycle way before the recent financial crisis.…”