Foreign Demand and Local House Prices: Evidence from the US

Foreign Demand and Local House Prices: Evidence from the US
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Volume/Issue: Volume 2020 Issue 043
Publication date: February 2020
ISBN: 9781513529264
$18.00
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Topics covered in this book

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Money and Monetary Policy , Demography , 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

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.