Foreign Demand and Local House Prices: Evidence from the US

February 28, 2020

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Format: Chicago

Damien Puy, Anil Ari, and Yu Shi. Foreign Demand and Local House Prices: Evidence from the US, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We test whether foreign demand matters for local house prices in the US using an identification strategy based on the existence of “home bias abroad” in international real estate markets. Following an extreme political crisis event abroad, a proxy for a strong and exogenous shift in foreign demand, we show that house prices rise disproportionately more in neighbourhoods with a high concentration of population originating from the crisis country. This effect is strong, persistent, and robust to the exclusion of major cities. We also show that areas that were already expensive in the late 1990s have experienced the strongest foreign demand shocks and the biggest drop in affordability between 2000 and 2017. Our findings suggest a non-trivial causal effect of foreign demand shocks on local house prices over the last 20 years, especially in neighbourhoods that were already rather unaffordable for the median household.

Subject: Foreign currency exposure, Housing, Housing prices, Money, National accounts, Population and demographics, Prices, Real estate prices

Keywords: Capital Flows, Foreign currency exposure, Foreign demand shocks, Global, House price, House Prices, Housing, Housing affordability, Housing boom, Housing prices, Interaction term, Political Risk, Real estate prices, Time series, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/043
Stock No:

WPIEA2020043
ISBN:

9781513529264
ISSN:

1018-5941

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