Foreign Demand and Local House Prices: Evidence from the US

IMF Working Papers, February 28, 2020

Source details

Research question: Do foreign demand shocks affect local house prices in the US?
Identification strategy: Exploits the existence of “home bias abroad” in international real estate markets; uses an extreme political crisis event abroad as a proxy for a strong and exogenous shift in foreign demand.
Key empirical comparison: Changes in house prices across neighbourhoods with varying concentrations of population originating from the crisis country.

House prices rise disproportionately more in neighbourhoods with a high concentration of population originating from the crisis country following the crisis event.
The effect is described as strong and persistent.
Robustness: The effect remains robust to the exclusion of major cities.
Cross-sectional pattern:
- Areas that were already expensive in the late 1990s experienced the strongest foreign demand shocks.
- Those same areas saw the biggest drop in affordability between 2000 and 2017.
Overall inference: Evidence suggests 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.

Subjects: Foreign currency exposure, Housing, Housing prices, Money, National accounts, Population and demographics, Prices, Real estate prices
Keywords include: Capital Flows, Foreign currency exposure, foreign demand shocks, Global, house price, House Prices, Housing, housing affordability, housing boom, Housing prices, interaction term, Political Risk, Real estate prices, time series, WP