current strongaccountstrong patterns and national real estate markets.pdf

Forthcoming, Journal of Urban Economics May 2009 Current account patterns and national real estate markets * Joshua Aizenman and Yothin Jinjarak Abstract This paper studies the association between current account and real estate valuation across countries. We find a robust and strong positive association between current account deficits and the appreciation of the real estate prices/(GDP deflator). Controlling for lagged GDP/capita growth, inflation, financial depth, institution, urban population growth and the real interest rate; a one standard deviation increase of the lagged current account deficits is associated with an appreciation of the real estate prices by 10%. This real appreciation is magnified by financial depth, and mitigated by the quality of institutions. Intriguingly, the economic importance of current account variations in accounting for the real estate valuation exceeds that of the other variables, including the real interest rate and inflation. Among the OECD countries, we find evidence of a decline over time in the cross country variation of the real estate/(GDP deflator), consistent with the growing globalization of national real estate markets. Weaker patterns apply to the non-OECD countries in the aftermath of the East Asian crisis. Keywords: Current account, real estate, appreciation, financial depth JEL Classification: F15, F21, F32, R21, R31 Joshua Aizenman Yothin Jinjarak UCSC and the NBER NTU Economics department, E2