Housing Markets, Wealth and the Business Cycle

Abstract

The paper examines the linkages between housing markets and the business cycle in OECD countries, focusing on how differences in the degree of resilience to economic shocks can be affected by the structural characteristics of housing and mortgage markets. The paper focuses specifically on: the transmission channel from housing wealth to consumption and on the factors behind house price variability, which help to determine whether the housing sector plays a stabilising role or not. Estimates of the marginal propensity to consume out of housing wealth are presented for ten OECD countries, where it is found that the strongest impact on consumption is in countries that have large, efficient and responsive mortgage markets. Particularly important in this regard is the degree of mortgage market “completeness” -- i.e. the extent to which the market is able to offer a variety of products and to serve a broad range of potential borrowers -- in particular, the extent to which they provide opportunities for housing equity withdrawal. With regard to house price variability, the significant differences found among OECD countries appear to be connected both to macro-economic factors (such as inflation variability) and to structural ones. House prices seem to be subject to larger oscillations in countries where housing supply is relatively inelastic (due, for example, to unnecessarily restrictive zoning regulations) and where a favourable tax treatment of mortgage interest encourages the leveraging of housing equity. A tentative conclusion is that structural policy settings that are desirable for the sake of efficient resource allocation also tend to be conducive to greater macro-economic resilience to shocks.

Keywords: Consumption, wealth, house prices, mortgage markets, business cycles

JEL Classification: D12, E21, E32