Did Monetary Policy Fuel the Housing Bubble?

Some observers say the 1998–2006 housing boom led to the global financial crisis and the 2007–2009 recession. The causes of the housing boom however, are a matter of considerable debate. This study attempts to settle this debate by identifying the major contributing factors to the housing boom and quantifying which factors were primary drivers and which merely played a supporting role. Specifically, we raise and answer three fundamental questions: Did monetary policy create the housing bubble? Are there other factors besides monetary policy that caused the housing bubble? Did monetary policy combine with other factors, such as changing regulations, the expanded role of GSEs, the increased pace of financial innovation, some sort of structural change, and rising international capital flows, to create the bubble? Our statistical analysis supports the hypothesis that monetary policy and global saving glut are statistically correlated with residential development and increased financial innovation. Moreover, we found a structural change is statistically associated with the rise in housing starts, home prices, and the use of alternative mortgage products. The combined effect of monetary policy with other contributing factors is not statistically meaningful. Additional studies might investigate this hypothesis using different techniques/datasets, but our results suggest that this hypothesis should not be ruled out.