News and noise in the housing market

Arbeitspapier

Housing prices are subject to boom and bust episodes with long-lasting deviation from fundamentals. By considering a present value housing price model under noisy information, I study the macroeconomic implications of movements in housing prices related (news) and not related (noise) to future fundamentals. I provide empirical evidence of the sizable macroeconomic effects of news and noise shocks. Following Forni et al. (2014, 2016), I identify news and noise shocks through a non-standard VAR technique which exploits future information. In the US, news shocks are the main driver of the housing market at low frequencies, but in the short-medium horizon noise shocks explain a large share of the variability in housing prices, residential investment and GDP. Historically, many housing cycles are driven by noise. The empirical findings are consistent with a model à la Iacoviello which features a rental market. In this model, the usual optimal policy exercise concerns an augmented Taylor rule and a pro-cyclical loan-to-value ratio. I propose pro-cyclical property taxes as the most effective policy tool to deal with fluctuations originating from the housing market.

Object Details

• ISBN: 978-92-899-2181-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1933

Classification and Topics

• Classification: Wirtschaft ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Money and Interest Rates: General ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General
• Subject: housing market ; macro-prudential ; noise ; non-fundamental VAR ; property tax

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gazzani, Andrea
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2016

Further information

• DOI: doi:10.2866/383026
• Handle: http://hdl.handle.net/10419/154366
• Last update: 10.03.2025, 11:43 AM CET