Business Cycles, Inflation, Monetary Policy and Their Role for Housing Price Dynamics

This study analyses the impact of technology shocks, inflation and monetary policy on house prices as well as the impact of the housing market on the business cycle, inflation and money market rates by structural vectorautoregressions for ten OECD countries. We find out that in nine of ten countries in our sample housing prices declined after a monetary policy shock, while they fall in eight of ten countries after a negative technology shock. This reaction is straightforward because regressive monetary policy increases the cost of financing real estate projects, while a recession correlates with declining investments. The reaction to an inflationary shock is twofold. In two countries house prices rise in response to inflationary pressures while they fall in the other eight countries. Rising house prices can be due to the fact that households increase their demand for real estate in order to use it as a hedge against future inflation, while falling house prices are due to the fact that the monetary authority raises interest rates in order to fight inflation, which increases the cost of financing real estate projects. The reaction of the money market to increasing house prices is also twofold. In half of the countries interest rates respond with an increase, while they decline in the other half. Interest rates might fall because increasing house prices increase the value of collateral which allows banks to increase their credit supply. On the other hand households increase their consumption expenditures which cause inflationary pressures on which the monetary authority reacts with raising money market rates. Forecast error variance decompositions yield the result that real restate price fluctuations can be explained to 25 percent by these macroeconomic shocks. On the other hand real estate price shocks explain also a part of macroeconomic fluctuations.