The Dynamic Relationship between Housing Prices and the Macroeconomy : Evidence from OECD Countries

This paper studies the dynamic relationship among house prices, income and interest rates in 15 OECD countries. We find that any disequilibrium in the long-run cointegrating relationship among these variables is corrected by the subsequent movement in house prices in most of these countries. This error-correction property of house prices implies that most of the variations in house prices are transitory, as compared to the movements in income and interest rates that are permanent, suggesting that the short-run movements in house prices are independent of the movements in income and interest rates. The results suggest that only the permanent movement in house prices, income and interest rates are associated with each other. We also find that the correlation in house price cycles across different OECD countries has changed over time with the highest correlation during the boom period of 1998-2005