Do house price developments spillover across euro area countries? Evidence from a global VAR

This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. A global VAR is estimated for three housing demand variables (real house prices, real per capita income, and the cost of borrowing, captured by a real long-term interest rate) on the basis of quarterly data for 7 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy and the Netherlands), which together comprise nearly 90% of euro area GDP, over the period 1971-2009. The results suggest limited house price spillovers in the euro area, albeit with evidence of some overshooting in the first year after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country's economic weight. This contrasts. with the impacts of a shock to domestic long-term interest rates, causing a permanent shift in house prices after 2-3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for weights - either economic or geographic - in governing their general magnitude. More generally, the impact of financing costs on house prices appears to have grown though time. (C) 2011 Elsevier Inc. All rights reserved.