International Capital Flows and House Prices: Theory and Evidence

This chapter examines the empirical relationship between house price changes and international capital flows, focusing on the boom-bust period in the housing market from 2000 to 2010. Foreign capital flows into safe US securities--US Treasury and Agency bonds--played a key role in understanding the low interest rates in the last decade and quantitatively account for all of the upward trend in the US net foreign liability position over this period. It is argued that easy credit caused the run-up in housing prices.