How did house and stock prices respond to different crisis episodes since the 1870s?

Abstract

This paper analyses the effects of different types of macroeconomic downturns on house and stock prices. While pre-crisis asset price bubbles are identified as major signals for macroeconomic fragility, recent literature document that house and stock prices are interlinked during recovery periods. To delve deeper into this post-crisis asset price behaviours, we project house and stock price paths following three different macroeconomic crises, normal recessions, financial recessions, and disasters, using historical macro-financial dataset since the 1870s for 17 western economies. We find that financial recessions have the most detrimental effect on house and stock prices followed by severe disasters like war and extreme weather. The results also reveal that stock prices drop substantially immediately after financial crisis and rebound within six years, while impacts to house prices are more persistent. The differences in magnitude and persistence of these effects can be attributed to the nature of crisis and asset class.