Residential Investment and Recession Predictability

33 Pages Posted: 20 Nov 2017

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

André K. Anundsen

Norges Bank; University of Oslo

Eyo I Herstad

University of Chicago

Date Written: November 16, 2017

Abstract

We assess the importance of residential investment in predicting economic recessions for an unbalanced panel of 12 OECD countries over the period 1960Q1–2014Q4. Our approach is to estimate various probit models with different leading indicators and evaluate their relative prediction accuracy using the receiver operating characteristic curve. We document that residential investment contains information useful in predicting recessions both in-sample and out-of-sample. This result is robust to adding typical leading indicators, such as the term spread, stock prices, consumer confidence surveys and oil prices. It is shown that residential investment is particularly useful in predicting recessions for countries with high home-ownership rates. Finally, in a separate exercise for the US economy, we show that the predictive ability of residential investment is robust to employing real-time data.

Keywords: Recession Predictability, Housing, Leading Indicators, Real-Time Data

JEL Classification: C33, C53, E32, E37

Suggested Citation

Aastveit, Knut Are and Anundsen, Andre Kallak and Anundsen, Andre Kallak and Herstad, Eyo I, Residential Investment and Recession Predictability (November 16, 2017). Norges Bank Working Paper 24/2017, Available at SSRN: https://ssrn.com/abstract=3073756 or http://dx.doi.org/10.2139/ssrn.3073756

Knut Are Aastveit (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Andre Kallak Anundsen

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, 0130
Norway

Eyo I Herstad

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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