Housing Market Stability, Mortgage Market Structure and Monetary Policy: Evidence from the Euro Area

This paper investigates how the monetary policy stance and the mortgage market structure affect the non-fundamental house price movements in 11 Euro Area countries. Based on a three stage approach, the empirical evidence suggests that a one-time monetary easing shock can significantly trigger house price boom in euro area countries with a liberal mortgage market and can explain over 20% of the forecasting error variance of nonfundamental house price run-ups in Ireland and Spain. In countries with more regulated mortgage markets, the monetary policy stance does not significantly affect the non-fundamental house price. Policy makers may focus on limiting mortgage equity withdrawals, Loan-to-Value ratios and monitoring tax policies in order to minimize the side effects of accommodative monetary policies on housing market stability for euro area countries, especially for peripheral countries which are more likely to be subjected to a too loose monetary policy stance.