News and noise in the housing market

Andrea Giovanni Gazzani

No 1933, Working Paper Series from European Central Bank

Abstract: Housing prices are subject to boom and bust episodes with long-lasting deviation from fundamentals. By considering a present value housing price model under noisy information, I study the macroeconomic implications of movements in housing prices related (news) and not related (noise) to future fundamentals. I provide empirical evidence of the sizable macroeconomic effects of news and noise shocks. Following Forni et al. (2014, 2016), I identify news and noise shocks through a non-standard VAR technique which exploits future information. In the US, news shocks are the main driver of the housing market at low frequencies, but in the short-medium horizon noise shocks explain a large share of the variability in housing prices, residential investment and GDP. Historically, many housing cycles are driven by noise. The empirical findings are consistent with a model JEL Classification: E30, E40, E50

Keywords: housing market; macro-prudential; noise; non-fundamental VAR; property tax (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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