The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada
Given the geographic concentration of oil production in Canada, oil price shocks are primary drivers of regional variation in income. It is widely believed that global oil price fluctuations only matter for the economy of oil-rich regions in Canada but can effectively be ignored in other regions. Based on detailed Canadian city-level and province-level data, our analysis shows that this view is mistaken. Unexpected increases in oil prices stimulate the Canadian economy in general and raise housing demand and real house prices in all regions across Canada.
We develop a theoretical model of how real oil price shocks spread across regions. The model differentiates between oil-producing and non-oil-producing regions and incorporates multiple sectors, trade between provinces, government redistribution and consumer spending on fuel. The model establishes that oil price shocks spread to housing markets in non-oil-producing regions as the government effectively redistributes oil revenue and as the volume of interprovincial trade increases.
Our finding that oil price shocks affect housing demand not only in oil-rich but also in oil-poor regions will ease the concern that a common interest rate policy may not equally suit all regions. It also suggests that regulators of mortgage markets in oil-poor regions must consider the consequences of fluctuating oil prices on their regions. Finally, the positive effect we find of oil price shocks on household debt and bank lending has implications for monitoring the risks in credit markets.