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The causality between house prices and stock prices: evidence from seven European countries

Manuchehr Irandoust

International Journal of Housing Markets and Analysis, 2020, vol. 14, issue 1, 137-156

Abstract: Purpose - This paper aims to examine whether there exists a long-run causal relationship between the prices of households’ two major assets: stocks and houses over the period 1975Q1–2017Q1 for seven major European countries. Design/methodology/approach - The paper uses the bootstrap panel Granger causality approach to determine the causal structure, focusing on cross-sectional dependence, slope heterogeneity and structural breaks. Findings - The findings show that, in most cases, there is a unidirectional causality running from stock price to house price but the converse is not true. This confirms a strong wealth effect in housing markets. The findings are important for not only households but also policymakers concerned with financial stability and housing prices. Originality/value - First, the methodology used here devotes full attention to dynamic co-movement between housing and stock markets. Second, this study uses a rather long quarterly data, which implies that the findings could be robust. Third, the study uses real personal disposable income as a control variable to remove the effects of economic growth. Fourth, most of the previous studies do not consider the presence of structural breaks and this makes the result of causality invalid and biased. Fifth, most of the previous studies on housing and stock markets concentrated on the US and non-European countries such as China, Korea and Singapore.

Keywords: House prices; Stock prices; Panel causality; Households; Tobin’s Q; Permanent income hypothesis; R3; C49; E44; G11 (search for similar items in EconPapers)
Date: 2020
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