Why House Prices Increase in the COVID-19 Recession: A Five-Country Empirical Study on the Real Interest Rate Hypothesis

Chung Yim Yiu

doi:10.3390/urbansci5040077

Abstract

There are substantial rebounds in house prices in many developed economies after the outbreak of COVID-19. It provides a special opportunity to test the real interest rate hypothesis empirically as a “synchronized” price rebound implies a common cause of house price hikes across the economies. This study conducts a panel regression analysis on five economies, namely Australia, Canada, European Union, New Zealand, the United Kingdom, and the United States of America, to test the hypothesis. The data range from 2017Q1 to 2021Q1. The results confirm that the real interest rate imposes a negative and significant effect on house price growth rate after controlling for economic growth factors, unemployment factors, and cross-country fixed effects. The empirical result of the five housing markets shows that a 1% fall in the real interest rate caused a 1.5% increase in house prices, ceteris paribus, in this period. It also provides casual evidence refuting the economic growth hypothesis and the migrant hypothesis in New Zealand. The results provide far-reaching practical implications on housing policy and on the ways forward to solve housing affordability problems.

Highlights

Urban Sci. 2021, 5, 77. https://Since the Global Financial Crisis, urban scientists have started investigating the GlobalUrban Housing Affordability Crisis [1,2]
Before presenting the regression results, some casual observations based on scatterBeforeplots presenting theprice regression results, some casual observations based on Figure scatter-8 shows the of house changes and real interest rates are examined first
2019, when both the economic growth turned to impose negative effects on house prices, the dominant and unemployment effectscame turned to the impose negativerates effects on The house prices, associations the domi- between positive effect from real interest only

Summary

Introduction

Urban Sci. 2021, 5, 77. https://Since the Global Financial Crisis, urban scientists have started investigating the GlobalUrban Housing Affordability Crisis [1,2]. Since the Global Financial Crisis, urban scientists have started investigating the Global. Urban Housing Affordability Crisis [1,2]. Researchers of IMF found that house prices are synchronized across countries, and they contended that it is caused by global interest rate shocks [3,4]. The COVID-19 pandemic provides a quasi-experiment to test their hypothesis. Since the end of 2019, a contagious disease of a new coronavirus named by WHO as COVID-19 spread across the world. It has led to millions of deaths and a global recessionary period. Unemployment rates of many developed economies have risen to record highs. The unemployment rates of the US and Canada rose to 14.8% and

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