Housing Prices, Residential and Nonresidential Investments and Macroeconomic Fluctuations

Abstract

During the recent financial crisis, the housing markets have played a notably important role in driving macroeconomic fluctuations. We investigate the correlation between housing dynamics and the business cycle for a variety of countries. Our empirical results exhibit the two daunting facts faced by lots of macroeconomic modelers: (i) house prices are highly volatile and closely correlated with the business cycle, which is at odds with the evidence that rental prices are relatively stable and almost uncorrelated with the business cycle; and (ii) residential investment leads the business cycle while nonresidential investment moves contemporaneously with the business cycle.