House Prices and Job Losses

Abstract

Why are house prices -80% correlated with job losses over the UK business cycle? My paper studies this striking fact together with the strong comovements between house prices and labour market variables in general. First, a regional panel is estimated to quantify the impact of house prices on the unemployment, job finding and job separation rates, whereby rejection rates of planning applications are used as instruments to find exogenous variation in house prices. Second, an orthogonalised VAR is used to estimate the aggregate impact of house price shocks. Both methods confirm the large impact of house price shocks on labour market variables and credit supply. To understand the mechanism, a general equilibrium model with collateral constraints, endogenous job separation and housing shocks is confronted with macroeconomic data via Bayesian methods. The results suggest that shocks to house prices (i) explain about 10% of output fluctuations and about 20% of fluctuations in corporate credit, unemployment and job separation rates via the collateral channel over the forecast horizon, and (ii) were a major cause in triggering the 1990 and 2008 recessions in the UK.