Housing Demand, Savings Gluts and Current Account Dynamics

Abstract

I show that, across and within countries, both the expansion and shrinking of the Global Imbalances since the mid 1990s are strongly correlated with the dynamics of housing markets. Then I study a quantitative model which can account for both the dynamics of housing and the global imbalances without any role for exchange rate driven expenditure switching. Housing demand drivers (population, LTV, housing expectations) alone imply counterfactual interest rate dynamics. Savings glut shocks alone generate the wrong housing price-to-rent ratios. Both types of shocks need to be combined. Counterfactuals using the model suggest that, as long as loan-to-values are regulated and housing expectations are not very optimistic, the large global imbalances of the mid-2000s are unlikely to return.