Identifying the Source of Fluctuations in House Prices

We o¤er a unique approach to identify the source of uctuations in house prices for 18 OECD countries. Our methodology exploits the information in correlations between house prices and the each of the following variables: current account, domestic real interest rates, business investment, and CPI. We compare the correlations suggested by the model with correlations we computed from the data. This enables us to di¤erentiate between various types of shocks that are studied in the literature. We \u85nd that during the 1998-2008 period, the change in the world interest rate is the main driving factor behind the house prices run-up in countries that experience persistent current account de cits. For the 1986-1996 period, the correlations for majority of the countries are consistent with a temporary but persistent loan-to-value ratio shock. We interpret these results as the outcome of the major \u85nancial liberalization process that most developed economies have gone through in early 1980s