The Effects of Capital Controls on Housing Prices

Abstract

Policymakers increasingly use capital control policies (i.e., capital flow management) to manage capital flows. However, whether the implementation of such policies can effectively affect housing prices and to what extent is less discussed. In this paper, I study the effects of four types of granular capital control policies on housing prices using a large cross-country panel of 53 economies from 1995 to 2017. I find that the estimated effects of capital controls are distinct for different capital flow types and flow directions, but all capital control inflow indices appear to reduce housing prices in the long-run. Additionally, I find that capital controls have asymmetric effects on housing prices for advanced economies and emerging markets. The negative effects of capital controls on housing prices are mainly driven by pre-crisis subsample, which means capital controls have been in effect several times before the Global Financial Crisis. I also estimate the effects for boom and slump periods respectively and find that capital control policies are implemented in an acyclical way. Since there exists endogeneity for capital control on real estate transactions, I further use IPWRA method to rebalance capital control actions and find that IPWRA estimators can weaken the negative effects on housing prices, and the attenuation effects can be attributed to endogenous factors.