House Prices and the Macroeconomy: Implications for Banking and Price Stability

House Prices and the Macroeconomy: Implications for Banking and Price Stability

House Prices and the Macroeconomy: Implications for Banking and Price Stability

House Prices and the Macroeconomy: Implications for Banking and Price Stability


House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in most developed countries. This book elucidates the two-way relationship between house-price fluctuations and economic fundamentals. Housing has many features which make it distinct from otherassets, like equity. Real estate is not only an asset but also a durable consumption good for households, providing shelter and other housing services. As a result, a house is often the largest and most important asset of households and therefore accounts for a major share of household wealth.Similarly a large share of bank assets is tied to housing values. House price fluctuations may, therefore, have a major effect on economic activity and the soundness of the financial system. Following an introductory chapter, the book is structured into three parts. The first demonstrates the importance of house prices as determinants or indicators of inflation and economic activity. The second focuses on the inter-relationships between bank credit extension and housing prices, and howbubbles can lead to financial crises. The third discusses resultant public policy issues, such as whether, and how, to include housing prices in a general inflation index, and how to restrain the housing/bank credit cycle.


The macroeconomic implications of asset price fluctuations have received increasing attention in academic and policy circles recently, in large part due to the recent boom–bust bubbles in the equity and now in the housing markets. Most studies in this area have focused on financial asset prices, while the role of house prices has not been explored to the same extent. Over recent years we have tried to fill this gap by investigating the role of asset prices, especially house prices, for various aspects of the macroeconomy. In this book we bring together the outcome of this research.

In the first chapter, which serves as a general introduction to the topic of this book, we provide an overview of the various channels through which house prices may affect economic activity. We also present some stylized facts and discuss how institutional features of the housing and mortgage market can determine the strength of the effect of house prices on the economy.

The remainder of the book is structured into three parts. The first part, consisting of Chapters 2 to 5, investigates the role and usefulness of house prices as determinants or indicators for goods price inflation and economic activity. In Chapter 2, we assess the predictive power of asset prices—i.e. exchange rates, equity prices, house prices, and other standard indicators such as the output gap, interest rates and money growth—for future consumer price inflation in industrialized countries. The results suggest that house prices are in general useful predictors of future inflation. In Chapter 3, we derive, on the basis of reduced-form coefficient estimates and VAR impulse responses, Financial Conditions Indices (FCIs), weighted averages of the short-term real interest rate, the effective real exchange rate, real house and real share prices, for the G7 countries. We find that house and share prices get a substantial weight in such an index and that the derived Financial Conditions Indices contain useful information about future inflationary pressures. Chapter 4 assesses the role of house prices in simple empirical versions of the New Keynesian model for the US and the euro area. We find that the real interest rate does not have a significantly negative effect on the output gap in standard specifications of the model. On the basis of an extended specification of the IS curve, also including house prices,

Chapter 2 is a reprint of Goodhart and Hofmann (2000a).

Chapter 3 is based on Goodhart and Hofmann (2001).

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