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Foreign Demand and Local House Prices: Evidence from the US
Author:
Mr. Damien Puy null

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Mr. Anil Ari
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https://orcid.org/0000-0002-8707-6985
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Ms. Yu Shi
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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 043
Language:
English
Publication Date:
28 Feb 2020
DOI:
https://doi.org/10.5089/9781513529264.001
ISBN:
9781513529264
ISSN:
1018-5941
Pages:
31
Keywords:
WP; time series; house price; housing boom; foreign demand shocks; interaction term; housing affordability; Housing prices; Foreign currency exposure; Housing; Real estate prices; Global; House Prices; Political Risk; Capital Flows
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund