Do changing prices in the US housing market mean similar shifts will be seen in house prices in the Netherlands? Will rising house prices in Amsterdam mean the same will be seen across the country? These are the types of questions examined by Michel Knoppel in his PhD thesis on housing market contagion, which he will defend online on Wednesday, 10 March.
The concept of contagion within housing markets has been understudied in comparison to other asset markets, such as those involving stocks and currencies. Knoppel: ‘But it has been observed that certain events, such as the US housing bust in 2007-8, seem to have triggered similar house price behaviour regionally and globally, and I wanted to explore and hopefully explain what was happening there.’
Put simply, ‘contagion’ is the situation in which the house price developments in one area influence house price developments in another. In his thesis, Knoppel initially examines the existence and extent of contagion from the US housing market to European countries’ housing markets. He looks at whether contagion is only evident during busts, such as the crisis of the late 00s, which has been the main focus of research until this point, or whether the effect is also evident during booms. Knoppel found that that US house price developments do indeed appear to have a contagious effect on the housing markets of many of Europe’s more advanced economies. Furthermore, his research suggests that boom periods in the US market could be leading to bubble tendencies in the markets of other countries, making them more open to subsequent busts or even crises.
In addition to examining international contagion, Knoppel also looks at the transmission of house price movements within country borders, so-called domestic contagion. As the name suggests, this concept looks at situations where price shocks in one region of a country influence price developments in other regions. Knoppel tested whether movements within the housing market in Amsterdam can have an effect on markets in other areas of the Netherlands. His results suggest that the contagion effect from Amsterdam does not reach the markets in every other region. But the provinces of Utrecht and North Brabant do appear vulnerable to contagion from Amsterdam, as do Gelderland, Drenthe, Limburg and Friesland to a lesser extent.
Knoppel goes on the examine which policy instruments could be effective in lowering the international contagion effect in housing markets, and how large the impacts could be. Specifically, he tests their regulating effect on international contagion from the US housing market and international spillovers from US monetary policy. His analysis shows that, when it comes to international contagion effects, stimulating the development of domestic securities markets can provide considerable moderation.
Regarding the moderation of international spillover effects, the stimulation of securities market policies; concentration limits for bank credit; and restrictions concerning the entry of foreign banks are found to be economically and statistically significant. Knoppel: ‘In a setting such as the Eurozone, where monetary policy is centralised and therefore cannot be aimed at specific countries, it is reassuring that individual countries still have instruments available to counter potential effects from international contagion and spillovers.’