Hot and Cold Housing Markets: International Evidence

This paper examines the experience of fourteen developed countries for which there are about thirty years of quarterly inflation-adjusted housing price data. Price dynamics is modeled as a combination of a country-specific component and a cyclical component. The cyclical component is a two-state Markov switching process with parameters common to all countries. We find that the latent state variable captures previously undocumented changes in the volatility of real housing price increases. These volatility phases are quite persistent (about six years, on average) and occur with about the same unconditional frequency over time. In line with previous studies, the mean of real housing price increases can be predicted to be larger when lagged values of those increases are large, real GDP growth is high, unemployment falls, and interest rates are low or have declined. Our findings have important implications for risk management in regard to residential property markets.