TY - JOUR AU - Favilukis, Jack AU - Kohn, David AU - Ludvigson, Sydney C AU - Van Nieuwerburgh, Stijn TI - International Capital Flows and House Prices: Theory and Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 17751 PY - 2012 Y2 - January 2012 DO - 10.3386/w17751 UR - http://www.nber.org/papers/w17751 L1 - http://www.nber.org/papers/w17751.pdf N1 - Author contact info: Jack Favilukis Sauder School of Business University of British Columbia Henry Angus Building 2053 Main Mall Office 867 Vancouver, BC V6T 1Z2 Canada E-Mail: jack.favilukis@sauder.ubc.ca David Kohn Department of Economics, 3rd floor Universidad Catolica de Chile Av. Vicuña Mackenna 4860 Santiago, Chile https://sites.google.com/site/davidkohn16/ E-Mail: davidkohn@uc.cl Sydney C. Ludvigson Department of Economics New York University 19 W. 4th Street, 6th Floor New York, NY 10002 Tel: 212/998-8927 Fax: 212/995-4186 E-Mail: sydney.ludvigson@nyu.edu Stijn Van Nieuwerburgh Columbia University Graduate school of Business Uris Hall, office 809 3022 Broadway New York, NY 10027 E-Mail: svnieuwe@gsb.columbia.edu M1 - published as Jack Favilukis, David Kohn, Sydney C. Ludvigson, Stijn Van Nieuwerburgh. "International Capital Flows and House Prices: Theory and Evidence," in Edward L. Glaeser and Todd Sinai, editors, "Housing and the Financial Crisis" University of Chicago Press (2013) AB - The last fifteen years have been marked by a dramatic boom-bust cycle in real estate prices, accompanied by economically large fluctuations in international capital flows. We argue that changes in international capital flows played, at most, a small role in driving house price movements in this episode and that, instead, the key causal factor was a financial market liberalization and its subsequent reversal. Using observations on credit standards, capital flows, and interest rates, we find that a bank survey measure of credit supply, by itself, explains 53 percent of the quarterly variation in house price growth in the U.S. over the period 1992-2010, while it explains 66 percent over the period since 2000. By contrast, once we control for credit supply, various measures of capital flows, real interest rates, and aggregate activity--collectively--add less than 5% to the fraction of variation explained for these same movements in home values. Credit supply retains its strong marginal explanatory power for house price movements over the period 2002-2010 in a panel of international data, while capital flows have no explanatory power. ER -