Financial and Macroeconomic Uncertainties and Real Estate Markets

We study the effect of macroeconomic and financial U.S. uncertainty shocks on international housing markets using a multi-country FAVAR model. This approach allows the identification of the effects of different sources of uncertainty on the global economy by imposing natural contemporaneous restrictions on the data generating process, which cannot be used within a single-country perspective. We find that financial uncertainty has an immediate negative effect on most REIT markets around the world lasting between one and three quarters. The effect of macroeconomic uncertainty is diverse. Various countries do not experience a negative effect on REIT markets. Some countries even show a positive response about a year after, suggesting housing markets outside the U.S. may benefit from increases in U.S. uncertainty, arguably due to the investment diversification opportunities they offer during times of economic distress in the U.S. The response of credit to uncertainty shocks resembles the response of REIT returns, but in a lower magnitude. This finding suggests that while housing markets and credit have important feedback mechanisms, housing markets respond also directly to financial uncertainty developments through the expectations channel.

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