The impact of oil shocks on the housing market: Evidence from Canada and U.S

Abstract

The recent volatility in oil energy markets invites us to re-assess the impact of oil prices changes on the macroeconomic environment. The Great Recession of 2007-2009 led to closer monitoring of global housing markets by regulators and market participants. Employing a structural vector autoregressive model, we find that the reaction of housing markets to oil price shocks varies significantly depending on whether the change in oil prices is prompted by demand or supply shocks in the oil market and on country oil trading status (i.e. net importer or net exporter). Our results are robust to the inclusion of different macroeconomic channels through which oil shocks may influence housing prices and control for restricted dynamic feedback effects. We also study the role of the phases of the housing cycle. JEL classification F30, G15

How Do Housing Returns in Emerging Countries Respond to Oil Shocks? A MIDAS Touch

“…impact supports Killins, Egly, and Escobari (2017) findings. In terms of the underlying economic intuition, a demand-oriented oil shock are associated with economic downturns which may lower the demand for oil and therefore its negative effect on real housing returns for non-oil-exporting countries such as China and India is not unexpected.…”

“…This may seem to validate the role of nonlinearity in the analysis of oil price effect (see also Hamilton 2011; Narayan and Gupta 2015; Salisu and Isah 2017; Salisu, Swaray, and Oloko 2019a). It also corroborates the stance of differing strength of the relationship between global oil prices and housing prices for net oilexporting countries than the net oil-importing countries (see Killins, Egly, and Escobari 2017).…”

“…Again, the OSS predicts RHR in India and Russia whenever negative asymmetry is incorporated into the model, which supports the stance of incorporating nonlinearity in oil price effect analysis (see also Hamilton, 2011;Narayan and Gupta 2015;Salisu and Isah 2017;Salisu, Swaray, and Oloko 2019a). The stance of differing strength of the relationship between global oil prices and housing prices for net oil-exporting countries than the net oil-importing countries is here again established (see Killins, Egly, and Escobari 2017). Consequently, the observed results are not markedly different from those of the main estimation results, as we found oil supply shocks to generally have negative and linearly increasing effect, with increased lags on real housing returns.…”

“…The reaction of the housing market to oil shocks may be dependent on whether the shock is supply-or demand-driven (see Killins, Egly, and Escobari 2017;among others). This intuition is also in line with the works of Kilian (2009) and Kilian and Park (2009), which assume that not all shocks are the same and therefore, there may be need to disentangle into demand and supply shocks with further extensions by Baumeister and Hamilton (2019), as earlier mentioned.…”

“…Given this, there exist a large number of studies, primarily dealing with advanced economies, that have aimed to predict housing market movements based on a wide-variety of models and predictors (see, Rahal 2015;Kishor and Marfatia 2018;;Hassani, Yaganegi, and Gupta 2019; for detailed reviews). In this regard, a burgeoning literature has started to analyze the impact of oil prices and shocks on house (real estate) price movements (see for example, Agnello et al 2017;Antonakakis, Gupta, and Muteba Mwamba 2016;Aye, Clance, and Gupta 2019;Breitenfellner, Cuaresma, and Mayer 2015;Chan et al 2011;Khiabani 2015; Kilian and Zhou 2018;Killins, Egly, and Escobari 2017;Nazlioglu, Gormus, and Soytas 2016). 1 These studies highlight at least six channels underlying the relationship between house and oil (energy) prices.…”