House Prices and Job Losses

This article studies the strong co-movement between house prices and job losses over the UK business cycle. An aggregate SVAR and a regional proxy SVAR model are used to provide empirical evidence on the effect of house prices on labour markets. To explain the mechanism, a general equilibrium model with collateral constraints, endogenous job separation and housing shocks is estimated via Bayesian methods. I find that shocks to housing demand: (i) explain about 10–20% of output fluctuations and 20–30% of labour market fluctuations via the collateral channel; and (ii) were a major cause in triggering the 1990 and 2008 recessions.