Common Shocks, Divergent Consequences: The Political Economy of Housing Bubbles

Analyses in international political economy (IPE) identify interest rate convergence, magnified in the process of European monetary integration, and financial market liberalization as causal factors behind the rise of house prices.  Despite these common credit supply shocks, developed economies experienced heterogeneous trends in housing inflation throughout the 1990s and 2000s. Turning towards demand determinants of housing prices, we focus on whether wage-setting institutions blunt financial liberalization’s impact on housing inflation via their restraining effect on incomes.  Employing both a panel analysis of 17 OECD countries, and a structured comparison of housing developments in Ireland and the Netherlands, we uncover two findings: income growth is a more important predictor of housing bubbles than financial variables (domestic credit expansion, the degree of capital account liberalization, and reductions in real interest rates) and; countries with coordinated labor market institutions that grant the export sector or the state agenda setting and/or veto powers over non-tradable sector unions in national wage-setting, realize more restrained income growth and, in turn, are less prone to housing bubbles.