The Propagation of Regional Shocks in Housing Markets: Evidence from Oil Price Shocks in Canada

The response of Canadian housing markets to oil price shocks provides strong evidence that shocks to the demand for housing that originate in one region also raise house prices in other regions. We develop a theoretical model that helps understand this finding. The model differentiates between oil-producing and nonoil-producing regions and incorporates multiple sectors, trade between provinces, government redistribution, and consumer spending on fuel. We empirically confirm the model prediction that oil price shocks are transmitted to housing markets in nonoil-producing regions by the government redistribution of oil revenue and increased interprovincial trade.