IMF Working Papers

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.