What explains house price booms? History and empirical evidence

Purpose - In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit and house price booms. Method - Using a panel of 11 OECD countries from 1920 to 2011 we estimate a panel VAR in order to identify loose monetary policy shocks, low inflation shocks, bank credit shocks, and house price shocks. Findings - We show that during boom periods there is a heightened impact of all three "policy" shocks with the bank credit shock playing an important role. However, when we look at individual house price boom episodes the cause of the price boom is not so clear. The evidence suggests that the house price boom that occurred in the United States during the 1990s and 2000s was not due to easy bank credit. Research limitations/implications - Shocks from the shadow banking system are not separately identified. These are incorporated into the fourth "catch-all" shock. Practical implications - Our evidence on housing price booms that expansionary monetary policy is a significant trigger buttresses the case for central banks following stable monetary policies based on well understood and credible rules. Originality/value of paper -This paper uses historical evidence to evaluate the relative importance of three main causes of house price booms. Our results bring into question the commonly held view that loose bank credit was to blame for the U.S. house price bubble of the later 1990s.