House prices co-move across countries, sometimes more sometimes less. We ask what US dollar funding conditions and the international banking network have to do with this co-movement.
We make three contributions. First, we establish that net capital flows to the US indicate how easy it is for non-US global banks to obtain dollar funding. Second, we illustrate that foreign lending of these banks varies with their exposure to dollar funding conditions – a concept we call dollar dependence. We construct this novel empirical measure of dollar dependence by combining granular data from the BIS consolidated and locational international banking statistics. Third, we show that the effect of dollar funding conditions on house price co-movement increases in what we call dollar co-dependence, defined as the extent to which two borrowing countries jointly rely on dollar-dependent creditors.
As more capital flows (on net) into the US from the rest of the world, it becomes easier for non-US global banks to borrow US dollars. Non-US global banks tend to finance a lot of their foreign lending in US dollars. Improved dollar funding conditions therefore drive these banks’ foreign lending to third-party borrowing countries. Much of the foreign lending is allocated to mortgage markets in borrowing countries, driving house prices. Hence, as dollar funding conditions vary over time, housing markets in borrowing countries co-move more strongly.
US net capital inflows drive the international synchronization of house price growth. An increase (decrease) in US net capital inflows improves (tightens) US dollar funding conditions for non-US global banks, leading them to increase (decrease) foreign lending to third-party borrowing countries. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of mortgage credit growth and, ultimately, house price growth. Importantly, this synchronization is driven by non-US global banks’ common but heterogenous exposure to US dollar funding conditions, not by the common exposure of borrowing countries to non-US global banks. Our results identify a novel channel of international transmission of US dollar funding conditions: As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more dependent on US dollar funding exhibit higher house price synchronization.
JEL Classification: F34, F36, G15, G21
Keywords: house price synchronization, US dollar funding, global US dollar cycle, global imbalances, capital inflows, global banks, global banking network