Is Housing the Business Cycle? A Multiresolution Analysis for OECD Countries

Fluctuations in housing markets11The authors thank Man Cho, Charles Leung, and audiences at Shanghai University of Finance and Economics, National University of Singapore, 2016 Global Chinese Real Estate Congress, 2018 NUS-PKU Annual International Conference on Quantitative Finance and Economics, 2018 Asian Real Estate Society Annual Conference, 2018 SMU Conference on Urban and Regional Economics, 2019 Annual AREUEA Conference, and 2019 China International Conference in Finance for helpful comments. Financial support by NUS HSSRF No. R-297-000-132-646 is greatly appreciated. have long been recognized as leading indicators of an economy. Leamer (2007, 2015) claimed that housing activities predict and cause national business cycles in the United States. We investigate his claims for a larger set of countries. We also examine this predictive relationship in multiple resolutions or timescales, namely, short-run and long-run variations of business cycles. Structural vector auto-regression (SVAR) models are estimated to test his more contentious causal claim. Our results show that housing indicators lead business cycles in most countries and that leading relationship is more prominent in the long run. In addition, our SVAR results for the United States indicate that housing factors are likely independent drivers of business cycles. Housing supply indicators predict short-run variations in business cycles, and housing price predicts long-run variations better. The cross-country evidence is less certain. Generally, our findings on timescale-based relationships between housing and the macro economy restrict future models of business cycles.