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Previous articleNext article FreeCommentLeonardo MelosiLeonardo MelosiFederal Reserve Bank of Chicago Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreI. Main CommentsThis very interesting paper addresses two questions: How synchronized are housing cycles across countries? What are the main driving forces in global and national house prices? The paper uses a panel data set that includes quarterly series of GDP, house prices, equity prices, credit, and the short- and long-term interest rates of 18 advanced OECD countries for the period 1971:1 to 2011:3. While the paper finds that house prices are synchronized across countries, the degree of synchronization is lower than that of real GDP and much lower than the prices of alternative assets, such as equity. Finally, the paper analyzes the contribution of some global shocks (i.e., monetary shocks, productivity shocks, credit shocks, uncertainty shocks, etc.) to the synchronization of house prices across countries. In this brief comment, I discuss the main contributions of the paper with strong emphasis on the new avenues for future research that the paper opens.Factors of segmentation for the world housing market. That house prices have exhibited a degree of synchronization that has intensified in recent years is not very surprising since a similar pattern has been widely documented for national incomes as well. What is important is that the paper finds that house prices are synchronized across countries less than real GDP, and much less than the price of alternative investment goods, such as equity. This finding suggests that the world housing market is quite segmented. In future studies, it will be crucial to evaluate the reasons for such a severe segmentation. There are several potential explanations: (a) the high transaction costs that characterize the housing market compared to financial markets; (b) the many national laws that regulate this market in most countries (Goodman and Thibodeau 1998); (c) the nature of houses themselves, which, for instance, requires lumpy adjustments for households (Khan and Thomas 2009). A quantitative investigation of these and other factors of segmentation for the housing market is very important, and hopefully this paper will encourage researchers to work on this topic.Factors of integration for local housing markets. Quite interestingly, the paper sheds light on how country characteristics relate to the integration of the national housing market. To this end, the authors construct a small database comprising the following variables: fraction of house price variance explained by the global house price, capital inflows (as percent of GDP), mortgages (as percent of GDP), ownership rate, and population density. They estimate a panel regression with fixed-effects and time-effects. The dependent variable is the fraction of house price variance in each country explained by the global house price factor. The regressors are capital inflows (as a proxy for the degree of financial integration), mortgages, ownership rates, and population density (all these variables, except for the last one, are in logs). Table 1 reports the results of this exercise: the house price variance due to the global factor is positively associated with the degree of financial integration.1Table 1. Housing Project Fixed Effects and Time Effects Regressiosn (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)Capital Inflows as % of GDP (logs)0.28** 0.31**0.26**0.26***0.29**0.29***0.27*** [0.10] [0.12][0.09][0.08][0.11][0.10][0.09]Mortgages as % of GDP (logs) 0.04 [0.22] −0.15 [0.26] −0.22 [0.25]−0.14 [0.24]−0.21 [0.23]Ownership rate (logs) 0.47 [0.40] 0.21 [0.28] 0.36 [0.32] 0.38* [0.21]Population Density −0.01** [0.00] −0.01*** [0.00] −0.01*** [0.00]−0.01*** [0.00]Constant−0.270.20−1.502.02***0.24−1.051.20**−0.891.610.44 [0.21][0.86][1.60][0.61][0.85][1.09][0.44][1.38][1.03][1.26]N31313131313131313131R20.510.290.350.420.530.520.600.550.610.64Adjusted R20.470.240.300.370.470.460.550.480.550.57View Table ImageWhile this exercise only scratches the surface of understanding the sources of synchronization in housing markets, it suggests that the integration of financial systems may have a nonneutral impact on the degree of integration of national housing markets. For instance, an important factor of integration for housing markets might be the degree of tightness of international banking linkages. I believe that this is an important topic for future research, as data on international banking linkages are available in the Bank for International Settlements (BIS) Location Banking Statistics Database (Kalemli-Ozcan, Papaioannou, and Perri 2012). Financial integration fosters international transmission of country-specific financial shocks. Negative country-specific financial shocks lead globally operating banks to pull out funds from the mortgage markets in all countries, causing house prices to become more synchronized across countries. This type of cross-border propagations of national shocks might have raised the synchronization of house prices since, in most countries, the banking system plays a prominent role in the housing markets. For instance, mortgage debt is the main liability of households in advanced economies. Furthermore, houses are widely used as collateral to borrow from banks. It is important to note that the effects of local shocks on the degree of synchronization of house prices depend on the nature of the shocks themselves. For example, country-specific productivity shocks may reduce the synchronization as they change the relative profitability of financial investments across countries.Cross-country correlations of common factors. The paper also reports the cross-country correlations of the common factors in table 8. Two important facts emerge. First, the common factor of house prices is highly correlated with the factors of credit and output for the full sample. Second, the correlations between the common factor of house prices and the factors of credit and output have declined over time. These two results deserve further attention in future research. The first result suggests that global liquidity and credit plays an important role for the synchronization of house prices across countries. Although the correlation falls in the second half of the sample, it still remains quite large. A visual inspection of figure 2 confirms this finding: the dynamic of the common factor of house prices closely resembles that of credit across all the samples. Furthermore, the reduction in the correlation between the common factor of house prices and that of credit might be due to the rapid acceleration of financial innovation in recent years. In this light, it would be interesting to assess the robustness of this finding when a broader definition of credit is used. Alternatively, country-specific reforms or other structural changes affecting some countries more than others (e.g., changes of the national mortgage markets, bank regulation, etc.) may have weakened the link between global credit and the common factor of house prices in the last 25 years.What are the effects of the recent global recession on the synchronization of house prices? The authors have also evaluated the synchronization of house prices for a subsample called the Great Moderation that ranges from 1985:1 to 2007:4. A separate investigation of this period is particularly important because of the unprecedented rapid boost in world trade volume and financial linkages that, as discussed earlier, might have influenced the synchronization of house prices. The observations from 2008:1 to 2011:3 are included in the globalization period and are characterized by a drastic contraction of world trade volume and by major turmoils in the international financial system. Quite interestingly, the findings regarding the synchronization of the house prices are mainly unchanged between the Great Moderation period and the globalization period, suggesting that the recent events might not have had significant effects on the degree of international synchronization of house prices.The role of global shocks. Authors identify a number of global shocks (i.e., monetary shocks, credit shocks, productivity shocks, and uncertainty shocks) using a recursive (i.e., Cholesky) scheme and sign restriction à la Uhlig (2005). Global shocks are shocks that contemporaneously affect the common factors of the observable variables (i.e., house prices, GDP, equity prices, short-term interest rates, etc.). The response of house prices and other variables to these shocks is found to be either not statistically significant or not very robust across the two identification schemes. The response of house prices to global uncertainty shocks is found to be statistically significant and robust during the globalization period, which ranges from 1985:1 to 2011:3.My concern with the introduction of the concept of global shocks is that these shocks may not be really structural since they might also capture (at least in part) the cross-border endogenous propagation of local disturbances.What are the macroeconomic implications of the world housing market integration for the propagation of local shocks? A paper investigating the propagation mechanisms of local shocks to the house prices across countries would be pathbreaking. Providing an answer to this question is very important given the strong implications of the house prices for the macroeconomic stability (e.g., Iacoviello and Neri 2010; Liu, Wang, and Zha 2011). Therefore, understanding the propagation of local shocks to macroeconomic aggregates and their spillover to other foreign countries should be a top priority for macroeconomists. For instance, we need to develop models to answer questions such as, how much is a financial shock in the United States expected to depress the housing market and output in the United Kingdom? Does a more integrated housing market help the national monetary authorities to achieve the goal of macroeconomic stability?II. Concluding RemarksI find this paper very stimulating, as it raises several important research questions. First, why are house prices less synchronized across countries than incomes and prices of alternative investment goods, such as equity? Second, what is the role of financial integration, including the integration of national banking systems, for the synchronization of house prices? Third, why has the cross-country correlation between the common factor of house prices and that of credit fallen in the last thirty years? Fourth, what are the macroeconomic implications of the world housing market integration for the propagation of local shocks and hence for macroeconomic stability? I expect that this paper will stimulate the study of these new promising venues for future research. Finally, I have discussed my concerns about interpreting the global shocks identified in the paper as structural. They are likely to capture the cross-border propagation of local shocks.EndnotesPrepared for the ISOM-NBER Conference, Oslo, Norway, June 15–16, 2012. The views in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Federal Reserve Bank of Chicago or any other person associated with the Federal Reserve System. For acknowledgments, sources of research support, and disclosure of the author’s material financial relationships, if any, please see http://www.nber.org/chapters/c12773.ack.1. This table has been gently provided by the authors. Standard errors are reported within square brackets. ***, **, * denote whether the estimated value for the parameters are statistically significantly different from zero at 1%, 5%, and 10% levels, respectively.ReferencesGoodman, A. C., and T. G. Thibodeau. 1998. “Housing Market Segmentation.” Journal of Housing Economics 7 (2): 121–43.First citation in articleGoogle ScholarIacoviello, M., and S. Neri. 2010. “Housing Market Spillovers: Evidence from an Estimated DSGE Model.” American Economic Journal: Macroeconomics 2 (2): 125–64.First citation in articleGoogle ScholarKalemli-Ozcan, S., E. Papaioannou, and F. Perri. 2012. “Global Banks and Crisis Transmission.” NBER Working Paper no. 18209. 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