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The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada

Author

Listed:
  • Lutz Kilian
  • Xiaoqing Zhou
Abstract
Shocks to the demand for housing that originate in one region may seem important only for that regional housing market. We provide evidence that such shocks can also affect housing markets in other regions. Our analysis focuses on the response of Canadian housing markets to oil price shocks. Oil price shocks constitute an important source of exogenous regional variation in income in Canada because oil production is highly geographically concentrated. We document that, at the national level, real oil price shocks account for 11% of the variability in real house price growth over time. At the regional level, we find that unexpected increases in the real price of oil raise housing demand and real house prices not only in oil-producing regions, but also in other regions. We develop a theoretical model of the propagation of real oil price shocks across regions that helps understand this finding. The model differentiates between oil-producing and non-oil-producing regions and incorporates multiple sectors, trade between provinces, government redistribution, and consumer spending on fuel. We empirically confirm the model prediction that oil price shocks are propagated to housing markets in non-oil-producing regions by the government redistribution of oil revenue and by increased interprovincial trade.

Suggested Citation

  • Lutz Kilian & Xiaoqing Zhou, 2018. "The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada," Staff Working Papers 18-56, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-56
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    2. Afees A. Salisu & Rangan Gupta, 2021. "How Do Housing Returns in Emerging Countries Respond to Oil Shocks? A MIDAS Touch," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(15), pages 4286-4311, December.
    3. Al Refai, Hisham & Eissa, Mohamad Abdelaziz & Zeitun, Rami, 2021. "The dynamics of the relationship between real estate and stock markets in an energy-based economy: The case of Qatar," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    4. Kilian, Lutz & Zhou, Xiaoqing, 2024. "Heterogeneity in the pass-through from oil to gasoline prices: A new instrument for estimating the price elasticity of gasoline demand," Journal of Public Economics, Elsevier, vol. 232(C).
    5. Sugaipov, Deni, 2022. "Estimating the impact of terms of trade news shocks on the Russian economy," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 66, pages 39-67.
    6. Andre Harrison & Annika Segelhorst, 2024. "Do consumer price indices in oil-producing economies respond differently to oil market shocks? Evidence from Canada," Empirical Economics, Springer, vol. 67(5), pages 2039-2076, November.
    7. Moghaddam, Mohsen Bakhshi, 2023. "The relationship between oil price changes and economic growth in Canadian provinces: Evidence from a quantile-on-quantile approach," Energy Economics, Elsevier, vol. 125(C).
    8. Canepa, Alessandra & Zanetti Chini, Emilio & Alqaralleh, Huthaifa, 2023. "Modelling and Forecasting Energy Market Cycles: A Generalized Smooth Transition Approach," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202318, University of Turin.
    9. Hao, Xianfeng & Zhao, Yuyang & Wang, Yudong, 2020. "Forecasting the real prices of crude oil using robust regression models with regularization constraints," Energy Economics, Elsevier, vol. 86(C).
    10. Herrera, Ana María & Karaki, Mohamad B. & Rangaraju, Sandeep Kumar, 2019. "Oil price shocks and U.S. economic activity," Energy Policy, Elsevier, vol. 129(C), pages 89-99.
    11. Katya Kartashova & Xiaoqing Zhou, 2020. "How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers," Staff Working Papers 20-18, Bank of Canada.
    12. Wang, Yudong & Hao, Xianfeng, 2022. "Forecasting the real prices of crude oil: A robust weighted least squares approach," Energy Economics, Elsevier, vol. 116(C).
    13. Flaccadoro, Marco, 2024. "Exchange rate pass-through in small, open, commodity-exporting economies: Lessons from Canada," Journal of International Economics, Elsevier, vol. 148(C).
    14. Muhammad Adil Rauf & Olaf Weber, 2022. "Housing Sustainability: The Effects of Speculation and Property Taxes on House Prices within and beyond the Jurisdiction," Sustainability, MDPI, vol. 14(12), pages 1-19, June.
    15. Nyakundi M. Michieka & Richard S. Gearhart & Noha A. Razek, 2024. "Oil Price Dynamics and Housing Demand in Oil Producing Counties in the U.S," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(2), pages 483-512, June.

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    More about this item

    Keywords

    Econometric and statistical methods; Housing; International topics; Labour markets; Regional economic developments;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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