Not all housing cycles are created equal: Macroeconomic consequences of housing booms

Abstract

This paper shows that not all housing price cycles are alike. The speed and persistence of house price increases during housing expansions are key determinants of both the severity of the subsequent downturn and the net macroeconomic impact over the cycle. Analyzing 180 housing expansions across 68 countries, we classify 49 % as housing booms, characterized by rapid and persistent real house price increases. We find that economic downturns are significantly deeper and longer when housing contractions are preceded by a housing boom. The housing contraction is more severe the more intense the preceding housing boom, and when accompanied by a credit boom. Overall, while housing booms spur stronger economic growth during the expansion phase, their sharp reversals lead to severe housing contractions, resulting in significant net negative effects on the real economy.