Has There Actually Been a Sustained Increase in the Synchronization of House Price (and Business) Cycles across Countries?

Abstract

Results of recent research suggest an increase in co-movement in house prices across countries since the mid-1980s, and this apparent increased synchronization has been attributed to greater globalization in the form of rising trade and financial flows. A similar line of research has indicated an increase in overall business cycle synchronization across industrialized countries, again since the mid-1980s, and again pointed to increased globalization as the cause. If such results on increased co-movement of housing and business cycles were correct, they would have implications portfolio management in real estate investment, as well as for macroeconomic policy coordination across countries. However, the recent research, while highlighting an important topic, is based on a flawed methodology. In this paper, we apply a newly developed set of international house price data and utilize some recently created tools which overcome the methodological problems of the previous papers. We find, contrary to the existing literature, that there has been no sustained increase in co-movement for either house prices or income across nations. These results are in accord with the theory on globalization, which shows that greater trade of investment flows may easily lower, rather than raise co-movement of economic variables across national borders.