Housing market volatility connectedness among G7 countries

ABSTRACT

This study investigates international linkages among housing markets in the G7 countries, using the connectedness methodology developed in Diebold and Yilmaz (2012, 2015). We find that volatility connectedness varies over the business cycle, with a surge during the global financial crisis. We also show that the United States and Italy were major net transmitters of housing market volatility shocks to other countries during the global financial crisis and the European debt crisis, respectively.

KEYWORDS:

• Housing markets
• spillover effect
• volatility connectedness
• G7 countries

JEL CLASSIFICATION:

• C32
• R31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Housing prices are deflated by the private consumption deflator. See the OECD analytical house price database (http://www.oecd.org/eco/outlook/focusonhouseprices.htm).

² As Leamer (2015) pointed out, the housing cycles are closely related to business-cycle fluctuations. Hence, we need to further consider the economic conditions of these countries in order to investigate whether such housing price changes are due to the international connectedness among housing markets or due to the domestic economic conditions. We plan to explore the connectedness among the G7 business cycles and co-movements between business cycles and housing markets as a future research agenda.

³ Similar observation is pointed out in Kim and Park (2016) that German housing market can be regarded as an outlier in contributing the world housing cycle, and it should have very weak, if any, co-movement with other housing markets.

⁴ Notice that Liow (2015) used the REIT index, the basic asset of which are commercial real estate, whereas this study used real housing price indices. Note also that Liow (2015) examined other types of assets (stocks, bonds, and currencies) as a group, which might also cause such differences.