Abstract
The size of the rental housing market in most countries around the globe is small. In this article, we claim that this may be detrimental to macroeconomic stability. We do it in three steps. First, using survey data for Poland, a country with a high homeownership ratio, we discuss microeconomic housing tenure choice determinants. Second, with a panel of 28 EU countries over the period 2004–2017, we provide evidence that the response of house prices to macroeconomic fundamentals is attenuated by the size of the private rental market. Third, we propose a DSGE model in which households satisfy housing needs both by owning and by renting. By simulating the model, we show that reforms enhancing the rental housing market contribute to macroeconomic stability. We conclude by formulating policy recommendations.
Highlights
The role of housing for the macroeconomy cannot be overstated
We do it by constructing a database for a panel of 28 EU countries over the years 2004–2017 and conducting a series of regressions, which show that the relationship between real house prices and the standard determinants depends on the size of the private rental market
In specifications from (ii) to (iv), we focus on single determinants of house prices, whereas in specification (v) is the unconstrained version of the model
Summary
The role of housing for the macroeconomy cannot be overstated. According to Leamer (2007), fluctuations in housing market activity are the core cause of the business cycle and the data on residential investment can be successfully used as an early warning sign of an oncoming recession. Rubio (2014b) finds, within a dynamic stochastic general equilibrium (DSGE) framework that a larger rental market makes monetary policy more stabilizing These results are confirmed by panel regressions of Cuerpo et al (2014) or Czerniak and Rubaszek (2018), who indicate that the rental market share diminishes fluctuations in the housing sector. We continue by providing the macro evidence that a high RMS is a factor stabilizing house price fluctuations We do it by constructing a database for a panel of 28 EU countries over the years 2004–2017 and conducting a series of regressions, which show that the relationship between real house prices and the standard determinants (economic activity, the level of interest rates, as well as the level of credit to households) depends on the size of the private rental market. The last section concludes and provides some interpretation of the results in the form of policy recommendations
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