Time-Varying Role of Macroeconomic Shocks on House Prices in the US and UK : Evidence from over 150 Years of Data

In this paper, we study the effect of macroeconomic shocks in the determination of house prices. Focusing on the U.S. and the U.K. housing market, we employ time-varying Vector Autoregression models using Bayesian methods covering the periods of 1830-2016 and 1845-2016 respectively. We consider real house prices, output growth, short-term interest rates and inflation as input variables in order to unveil the effect of macroeconomic shocks on house prices. From the examination of the impulse responses of house prices on macroeconomic shocks, we find that technology shocks dominate in the U.S. real estate market, while their effect is unimportant in the U.K. In contrast, monetary policy drives most of the evolution of the U.K. house prices, while transitory house supply shocks are unimportant in either country. These findings are further corroborated with the analysis of conditional volatilities and correlations to macroeconomic shocks. Overall, we are able to unveil the dynamic linkages in the relationship of the macro economy and house prices. Over time, we analyze the variations in economic events happening at the imposition of the shock and uncover characteristics missed in the time-invariant approaches of previous studies