We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices. House prices in many advanced countries have moved in tandem during the past decade. They first increased unusually rapidly prior to the global financial crisis reaching in some cases levels not previously seen. House prices then collapsed over the period 2006–11 and have recently started to rebound in some of these countries. These highly synchronized fluctuations in housing markets first coincided with a period of high growth, but then were followed by severe financial disruptions and deep recessions. In light of these observations, this paper addresses two specific questions to have a better understanding of fluctuations in global housing markets: First, how synchronized are housing cycles across countries? Second, what are the main shocks driving movements in global house prices?

Our interest in house prices is clearly motivated by recent developments, but there are also simpler, and probably more fundamental, reasons to study the dynamics of housing markets because of the key role housing plays in modern societies. First, housing satisfies people need for shelter. Second, housing-related activities account for an important fraction of GDP and household expenditures. Third, housing is the main asset and mortgage debt is the main liability held by households in many advanced countries. Therefore, large movements in house prices, by affecting households’ net wealth and their capacity to borrow and spend in residential investment, can have serious macroeconomic implications. In theory, interactions between house prices and the real economy can be amplified when financial imperfections are present. This amplification largely occurs through the financial accelerator and related mechanisms operating through firms, households and countries’ balance sheets. According to these mechanisms, an increase (decrease) in asset prices improves (worsens) an entity’s net worth, enhancing (reducing) its capacity to borrow, invest, and consume. This process, in turn, can lead to further increases (decreases) in house prices and produce general equilibrium effects.2 In other words, disturbances in housing markets can translate into much larger cyclical fluctuations in the real economy.