How Housing Slumps End

Kevin O'Rourke and Augustin S. Benetrix and Barry Eichengreen
Authors registered in the RePEc Author Service: Agustín S. Bénétrix and Barry Eichengreen

No 577, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We construct a simple probit model of the determinants of real house price slump endings. We find that the probability of a house price slump ending is higher, the smaller was the pre-slump house price run-up; the greater has been the cumualtive house price decline; the lower are real mortgage interest rates; and the higher is GDP growth. Slumps are longer, other things being equal, where housing supply is more elastic, but shorter the more developed are financial institutions. For slumps of a given size, shorter sharper slumps are associated with worse macroeconomic performance in the short run, but with better performance in the long run. This suggests that for sufficiently low discount rates, policy makers should not impede the decline in real house prices, and this conclusion is reinforced by the finding that after a certain duration, house price slumps can become self-reinforcing. On the other hand, we also find evidence that during downturns, falling house prices can lead to lower private sector credit flows. Policy makers thus face a delicate balancing act. While they should not intervene to artifically prop up overvalued house prices, they should ensure that their macroeconomic and banking policies are such as to make a bottoming-out more likely. This suggests that they should keep real interest rates low, and ensure that banks are well-capitalised.

Keywords: House prices; Slumps; Probit; VAR (search for similar items in EconPapers)
JEL-codes: C41 E32 R30 (search for similar items in EconPapers)
Date: 2011-10-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: How housing slumps end (2012)
Working Paper: How Housing Slumps End (2011)
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