Wavelet Linkages of Global Housing Markets and Macroeconomy

This paper proposes a novel approach to uncover the linkages of the housing market and macroeconomy for fifteen OECD countries. One of the limitations of conventional approach is that it does not distinguish the time domain from the frequency domain. However, econometric and economic rationale suggests that this distinction is crucial. We address this issue by proposing a semi/non-parametric approach of Wavelets which capture the relationship in the time-frequency space. The Cross-Wavelet coherence plots clearly show that the relationship varies significantly across countries, time, frequencies, and the direction of causation. Overall, house price movements are related to interest rates at the higher frequencies (short-run) and per capital income growth at the lower frequencies (long-run). Furthermore, the role of industrial production and income growth is found to switch over time at lower frequencies, particularly in Finland, France, Sweden, and Japan. The stock market's nexus with the housing market is significant mainly at high to medium frequencies around the recent financial crisis. However, throughout the 1976-2016 period, the U.S. stock market's relationship is significant, although it has gradually transitioned from medium to low-frequency movements. The direction of causation between the housing market and macroeconomic variables also differs across time and frequencies