Riding the asset wave: The stock and house price relationship in the G7

We present empirical evidence on the relationship between stock prices and house prices across the Group of Seven (G7) nations, spanning a vast timeframe from 1870 to 2016. We employ multiple estimation approaches, including parametric panel data models that incorporate interactive fixed effects and non-parametric models capable of analysing non-linear patterns and the time-varying dynamics of the relationship between stock prices and house prices. Our parametric results suggest that stock prices are positively associated with house prices. The non-parametric time-varying estimates exhibit non-linear properties. We find that our results remain robust to a suite of tests. The positive relationship between stock prices and house prices suggests potential for increased consumer spending or asset bubbles that require close monitoring. There is also a risk that an increase in house prices can impact overall price levels, with implications for monetary policy adjustments. Importantly, increased house prices exacerbate housing affordability issues. Housing unaffordability is an ongoing issue in many developed countries. Given the role of stock prices in influencing house prices, policymakers may need to implement relevant measures that offset housing affordability issues that might emerge.