Euro Housing Market Co-Movement: Medium vs. Short-Term Cycles

Abstract

A lack of co-movement among the national housing markets in the euro monetary union makes the job of the ECB difficult. If markets are depressed in some countries, while booming in others, the ECB would be unable to create simultaneous loose and tight monetary conditions tailored to each national situation. Co-movement across national housing markets has thus been a topic of several previous studies. Most of these papers focused on business-cycle frequency dynamics. Medium term cycles, however, have been shown to play a more important role for long-run output and the financial cycle than short-term fluctuations. We examine both business cycle and medium-term components of housing in eight euro nations. We find that the medium cycle is more volatile than the business cycle component in all markets. This indicates the medium cycle plays a more important role for housing in the long-run than short-term fluctuations. We find, however, that there is greater co-movement among the medium cycles of different national housing markets than between the short-term fluctuations.

We also find that co-movement of short-term cycles did appear to spike subsequent to the euro’s adoption, but that this greater apparent integration did not persist, and short-term co-movement has fallen in recent years. Finally, although medium-term co-movement is for most countries higher than that of the business cycle frequency, this greater synchronization does not appear to be a function of the euro common currency itself.