The Dynamic Relationship between House Prices and Output: Evidence from US Metropolitan Statistical Areas

This paper investigates the long-run and short-term dynamics of 351 US metropolitan statistical area housing prices in relation to personal income. We apply a panel cointegration approach on annual data from 1993 to 2011 and find a long-run relationship between local house prices and per capita personal income. The causal direction is then assessed based on an autoregressive distributed lag specification that also accommodates for error-correction. Results from Granger-causality tests reveal the existence of a bi-directional causality between real house prices and real per capita personal income over both long- and short-horizons. We conclude that changes in personal income can predict house price movements and vice versa.