Monetary shocks and house prices in Europe

The purpose of this study is to investigate the effect of conventional and unconventional monetary policy shocks on housing price dynamics and the economy. We also examine the effect of a housing price shock on monetary policy and its implications for the economy. To do so, we implement an SVAR model for the six major European countries (France, Germany, Italy, Netherlands, Spain and the United Kingdom) and thirteen European markets (Paris, Lyon, Marseille, Berlin, Munich, Frankfurt, Amsterdam, Madrid, Barcelona, Seville, London, Birmingham and Manchester) for the last 20 years (2000-2020). We use impulse response functions to understand the effect of a policy rate and a balance sheet shock on housing prices. We also conduct a forecast error variance decomposition analysis to explore each shock’s effect on housing prices across markets. We find that a contractionary policy rate has a negative influence on house prices. Moreover, an expansionary balance sheet shock has a positive impact on housing prices in all countries, but the effect is heterogeneous according to markets. An unconventional monetary policy shock has greater explanatory power regarding housing prices than a conventional one except in the United Kingdom. The market-level analysis indicates that a conventional monetary policy shock explains a larger share of total housing price variance than an unconventional monetary policy shock in markets such as Paris, Lyon, Madrid, London, Birmingham, Manchester and Amsterdam whereas the opposite is true in the German markets, Barcelona and Seville. In Marseille, both policy types have the same explanatory power. Finally, we find that conventional and unconventional monetary policy shocks have a greater impact in more liberalized credit markets.