The Bank of England just published a research paper on “Global liquidity, house prices and the macroeconomy: evidence from advanced and emerging economies“. This paper compares house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012 and models the impact of changing global liquidity, broadly understood as a proxy for the international supply of credit by aggregating bank-to-bank cross-border credit flows. They find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronised across countries than in advanced economies. They suggest that house prices amplify the response to global liquidity shocks in both advanced and emerging economies, but through different mechanisms. In advanced economies, arguably by boosting the value of housing collateral and hence supporting more household borrowing; whereas in emerging markets, by generating a lower default risk and a more appreciated exchange rate that support the international borrowing capacity of the economy.
They observe that the exchange rate seems to have a traditional shock absorbing role in advanced economies and collateral valuation effect in emerging economies. Indeed, studying the interaction between house prices and the exchange rate in models with both domestic and international financial friction may be an interesting area of future research.
