Cross-Country Evidence on the Causal Relationship between Policy Uncertainty and Housing Prices

Abstract

In this paper, we examine the causal linkages between policy uncertainty and housing prices in a panel of seven advanced countries including Canada, France, Germany, Italy, Spain, the United Kingdom, and the United States. We implement a bootstrap panel causality test on quarterly data from 2001:Q1 to 2013:Q1, which allows us to circumvent the data limitation as observations are pooled across countries. The results provide evidence of a bi-directional causality between real housing prices and policy uncertainty, suggesting that high uncertainty related to future economic fundamentals and policies increases housing price volatility, which in turn may amplify financial and business cycles. The results also show bi-directional causality for France and Spain, but only unidirectional causality for the remaining countries. Specifically, unidirectional causality runs from policy uncertainty to real housing prices in Canada, Germany and Italy and from real housing prices to policy uncertainty in the U.K. and the U.S.