The Housing Sector over Business Cycles: Empirical Analysis and DSGE Modelling

In this paper, we analyse the dynamics of the housing sector over business cycles. First, we provide an empirical analysis of the relationships between housing sector data and the main macroeconomic variables both on Czech data and on a sample of advanced economies. We document that in most countries the housing sector co-moves with the rest of the economy. In the past, the Czech housing market showed temporary episodes during which the housing sector was seemingly disconnected, but since 2005 the housing sector has become more cyclical. Second, we develop a cascade of increasingly complex DSGE models to assess the relative merits of each additional mechanism. Contrary to the popular framework with collateral constraints, we concentrate on the housing sector as an additional production sector via the standard supply and demand mechanisms. Our results confirm that these standard mechanisms are sufficient to replicate the observed comovements of housing market variables.