The foreign capital inflows and the boom in house prices: time-varying evidence from emerging markets

ABSTRACT

This study applies time-varying parameter methods to investigate the association of foreign capital inflows with the occurrence of house price booms in a sample of emerging markets. The time-varying causality tests show evidence of unidirectional as well as bi-directional causality between gross foreign capital inflows and house prices. Furthermore, the upward evolution of the time-varying impact of foreign capital inflows on house prices appears to be mostly related to the distinct episodes of the housing booms as shown by the results of time-varying parameter regression. However, there are instances where the time-varying impact of foreign capital inflows abruptly shifts upward without causing price booms in the housing market. We also find evidence that some components of foreign capital inflows are negatively affecting house prices during the boom episodes.

KEYWORDS:

• Foreign capital inflows
• house prices
• boom episodes
• emerging markets
• time-varying regression

JEL classification:

• F32
• F21
• E44

Disclosure statement

The authors have no potential conflict of interest to declare.

Data availability statement

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

1. As stated by Glindro et al. (2011), housing supply responds only gradually to changes in demand conditions due to delays in obtaining permits, as well as design and construction lags.

2. The cyclical component of Hamilton’s regression filter is selected as dependent variable for various reasons. Besides being a better indicator for price boom, it has been shown to be more robust than HP filter. More importantly, it helps to avoid the simultaneity between growth rate of house prices and capital flows in the regression model, which could lead to the problem of endogeneity. Therefore, the model is supposed to perform better with cyclical component of Hamilton’s filter selected as dependent variable.

3. CPI is included to proxy for the price pressures that stem from the overall level of commodity prices, while interest rate and credit growth are included to control for the role of tightening and expansionary monetary policies in changes of house price cycles.

Additional information

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes on contributors

Boubekeur Baba

Boubekeur Baba holds a Ph.D. in business administration of finance, his area of research includes but not limited to international finance, corporate finance, and economics.

Güven Sevil

Güven Sevil currently works as a professor of finance and financial risk management at Anadolu University, his research interest is related to various areas of finance, particularly stock markets, risk management in small and medium enterprises, and financing activities of the private sector.