Residential Investment & the Business Cycle:
International Evidence
Paul Stroik & Laura Berlinghieri • Economics Department • UW-Eau Claire
Introduction

Three countries, in addition to the U.S., showed below-normal (downward-sloping) spending on residential
investment prior to the most recent recession: Czech Republic, Greece, Japan.
*Downward-sloping line indicates spending that is below normal.
12%
Abnormal Contributions to GDP Growth
Czech Republic
10%
8%
2.0%
6%
4%
1.0%
2%
2007Q2
2004Q4
2002Q2
1999Q4
1997Q2
1994Q4
1992Q2
1989Q4
1987Q2
1984Q4
1982Q2
1979Q4
1977Q2
1974Q4
1972Q2
1969Q4
1967Q2
1964Q4
1962Q2
1959Q4
1957Q2
1954Q4
-2%
0.0%
1952Q2
0%
-4%
-6%
2007Q1 2007Q2 2007Q3 2007Q4 2008Q1
-1.0%
-3.0%
Objective
Recession Start Date
Country
Recession Start Date
Australia
2008, 1st quarter
Netherlands
2008, 1st quarter
Belgium
2008, 2nd quarter
New Zealand
2007, 4th quarter
Canada
2007, 3rd quarter
Portugal
2007, 1st quarter
2008,
1st
France
2008,
1st
Germany
-2.0%
0.5%
Abnormal Contributions to GDP Growth
U.S.
4.5%
3.0%
0.0%
2007Q1 2007Q2 2007Q3 2007Q4 2008Q1
Consumption
Investment
Residential Investment
Government
Net Exports
1.5%
0.0%
2007Q1 2007Q2 2007Q3 2007Q4 2008Q1
-1.5%
-3.0%
-4.5%
-2.0%
-6.0%
Eleven countries experienced below-normal (downward-sloping) spending in a different component of
GDP (e.g. government spending, net exports) prior to the most recent recession. Examples shown below.
Abnormal Contributions to GDP Growth
Netherlands
Abnormal Contributions to GDP Growth
New Zealand
1.0%
3.0%
0.5%
2.0%
2008,
South Korea
2008,
1st
2008, 1st quarter
Spain
2007, 3rd quarter
-0.5%
Greece
2008, 2nd quarter
Sweden
2007, 4th quarter
-1.0%
Italy
2008, 2nd quarter
Switzerland
2007, 4th quarter
-1.5%
-2.0%
Japan
2008, 1st quarter
U.S.
2008, 1st quarter
-2.0%
-3.0%
quarter
quarter
Slovak Republic
quarter
0.0%
quarter
2007Q1 2007Q2 2007Q3 2007Q4 2008Q1
Consumption
Investment
Residential Investment
Government
Net Exports
Other countries with below-normal government spending:
South Korea, Portugal
Methods
Collect GDP data for 18 countries from the Organization of Economic Cooperation and Development (OECD) database
as well as national statistical agencies
For each country…
 Calculate “normal” contributions to GDP growth for each of the four categories of GDP as well as the subcategory of
residential investment
•
Use kernel density estimates to determine the normal contributions
 Subtract the normal contribution from the actual contribution to obtain the “abnormal” contribution to GDP growth for
each category
 Calculate the cumulative abnormal contributions to GDP growth
 Create charts to visually represent the cumulative abnormal contributions to GDP growth for each of the four GDP
categories as well as the subcategory of residential investment
•
A downward-sloping line means that the contribution of the category/subcategory is below normal.
•
An upward-sloping line means that the contribution of the category/subcategory is above normal.
•
A horizontal line means that the contribution of the category/subcategory is normal.
 Inspect the set of charts for each country in order to determine what category/subcategory of GDP was below normal
prior to the most recent recession
Consumption
Investment
Residential Investment
Government
Net Exports
-1.5%
1st
Czech Republic

-1.0%
Abnormal Contributions to GDP Growth
Japan

Country
2007Q2 2007Q3 2007Q4 2008Q1 2008Q2
Consumption
Investment
Residential Investment
Government
Net Exports
-4.0%
-1.0%
Determine whether or not below-normal spending on residential investment (housing) contributed significant
weakness to GDP growth leading into the most recent recession for a group of developed countries.
0.0%
-3.0%
-8%
-0.5%

Consumption
Investment
Residential Investment
Government
Net Exports
-2.0%
over the 1947-2009 period have been preceded by below-normal
spending on residential investment
Abnormal Contributions to GDP Growth
Greece
2.0%
1.0%
1949Q4

Generally speaking, economists believe that
recessions (a decrease in production or GDP)
begin with a slump in investment spending by
businesses (e.g. buildings, machinery,
equipment), which is why the short-run
fluctuations in the economy are referred to as the
“business cycle.”
Previous research for the U.S. finds that spending
on residential investment (housing), a
subcategory of investment spending, is below
normal leading into recessions and, therefore,
contributes significant weakness to the growth
rate of GDP as the U.S. economy enters a
recession.
U.S. Recessions, 1947-2009 (Shaded)
& Spending on Residential Investment*
1947Q2

Results

1.0%
0.0%
2006Q4 2007Q1 2007Q2 2007Q3 2007Q4
-1.0%
Consumption
Investment
Residential Investment
Government
Net Exports
Other countries with below-normal spending in net
exports: Australia, Belgium, Canada, Germany, Slovak
Republic, Spain, Sweden
The remaining three countries (France, Italy, Switzerland) were inconclusive; there did not appear to be
significant weakness in just one spending category prior to the most recent recession.
Conclusions


Even though below-normal spending on residential investment (housing) played a significant role in the most recent
recession in the U.S, this is not observed in the majority of the developed countries examined in this study. A few
countries experienced below-normal spending by the government while many others encountered net exports that
were below normal.
Further research will investigate whether these cross-country differences can be explained by differences in housing
finance structures and/or incentives for homeownership observed across these 18 countries.
Acknowledgements

We would like to acknowledge funding support from UW-Eau Claire’s Office of Research and Sponsored Programs
and Differential Tuition.