This paper investigates the developments in house price synchronization across countries by a dynamic factor model using a country- and city-level dataset and examines what drives the synchronization. The empirical results indicate that: (i) the degree of synchronization has been rising since the 1970s, and (ii) a large heterogeneity in the degree of synchronization exists across countries and cities. A panel and cross-sectional regression analysis show that the heterogeneity of synchronization is partly accounted for by the progress in financial and trade openness. Also, the city-level analysis implies that the international synchronization is mainly driven by the city-level connectivity between large and international cities.

House price dynamics are tightly connected with macroeconomic performance via various channels. For instance, in housing booms, households possibly take excessive risks in borrowing supported by increasing house prices, but in the face of ensuing housing price collapse, they could face a tighter budget constraint due to the underwater mortgages caused by declines in house prices, forcing them to substantially reduce their consumption (Mian and Sufi, 2009). Such a risk to macro-financial stability through the housing cycle has been a concern for policymakers for a long time, but if each country’s housing prices were isolated from each other, such a risk would be contained in a given country and so policymakers in other countries would not need to be concerned about it. However, if housing prices were synchronized across countries, a risk to macro-financial stability through the housing cycle in one country could be amplified and transmitted to another country, thus possibly causing macro-financial instability on a global scale. Hence, investigating the developments in house price synchronization and its driving force is an important policy issue in monitoring risk to macro-financial stability.