Survey_TZ_2004

Abstract

The model includes five endogenous variables besides house price growth: (i) the growth rate of GDP, which provides a measure of the state of the business cycle and household income, (ii) the rate of inflation in consumer prices, which is the only nominal variable in the system, (iii) the real short-term interest rate, which is closely linked with the monetary policy stance, (iv) the term spread, defined as the difference in yield between a long-maturity government bond and the short rate, and (v) the growth rate in inflationadjusted bank credit. The economic motivation for the inclusion of these variables is fairly clear from the discussion in the previous section. What merits further discussion is the exclusion of some other factors that arguably have a bearing on the determination of house prices. We found that GDP growth summarises the information contained in other more direct measures of household income, such as unemployment and wages. We thus decided against including these variables on grounds of parsimony of specification. In addition, we experimented with the inclusion of equity market returns, a competing asset in household portfolios. This did not yield any significant coefficients. We interpret this as an indication that, in normal times, the co-movement between equity and housing prices is driven by their mutual link to business cycle dynamics and the yield curve. The regularities in the relationship between the peaks in the two markets obtained by Borio and McGuire (2004) relate to particular phases in their respective price cycles, which are quite distinct.