Real Estate Valuation, Current Account, and Credit Growth Patterns Before and After the 2008–2009 Crisis

Abstract

This paper explores the stability of the key conditioning variables accounting for real estate valuation before and after the crisis of 2008–2009, in a panel of 36 countries, for the period of 2005:I–2012:IV, recognizing the incidence of global financial crisis. Our paper validates the robustness of the association between the real estate valuation of lagged current account patterns, both before and after the crisis. The most economically significant variable in accounting for real estate valuation changes turned out to be the lagged real estate valuation appreciation (real estate inflation minus consumer price index [CPI] inflation), followed by changes in the current account deficit/gross domestic product (GDP), domestic credit/GDP, and equity market valuation appreciation (equity market appreciation minus CPI inflation). The first three effects are economically substantial: a one standard deviation increase in lagged real estate appreciation is associated with a 10% increase in the present real estate appreciation—much larger than the impact of a one standard deviation increase in the current account deficit (5%) and of the domestic credit/GDP growth (3%). Thus, the results are supportive of both current account and credit growth channels, with the animal-spirits and momentum channels playing the most important role in the boom and bust of real estate valuation.