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Monetary transmission through the housing sector

Author

Listed:
  • Albuquerque, Daniel

    (Bank of England)

  • Lazarowicz, Thomas

    (University College, London)

  • Lenney, Jamie

    (Bank of England)

Abstract

The simultaneous rise in housing rents and interest rates over 2022–24 brought scrutiny to the interaction between monetary policy and the housing market. We start by providing evidence on this interaction using data from the United Kingdom and a high frequency identification. Our main empirical finding is that house prices and rents do not move together after an increase in interest rates. House prices fall strongly but gradually, reaching their trough after one year, while nominal rents are stable for one to two years, before eventually falling. Next, we develop a quantitative Heterogeneous Agent New Keynesian model that includes housing and rental sectors. In particular, we model individual landlords as the marginal providers of rental housing. We use the model to examine the housing channel of monetary policy where we find: (1) the housing channel is large and falls disproportionality on mortgagors; (2) deviations from rational expectations mean landlords largely fail to pass on mortgage costs and act more like wealthy hand to mouth; (3) these behavioural biases dampen the potential trade-off between prices and output induced by the rental market; and (4) that it may be optimal for monetary policy makers to look through and accommodate housing supply shocks.

Suggested Citation

  • Albuquerque, Daniel & Lazarowicz, Thomas & Lenney, Jamie, 2025. "Monetary transmission through the housing sector," Bank of England working papers 1115, Bank of England.
    • Handle: RePEc:boe:boeewp:1115
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    References listed on IDEAS

    as
    1. Adrien Auclert & Ludwig Straub & Matthew Rognlie, 2019. "Micro Jumps, Macro Humps: monetary policy and business cycles in an estimated HANK model," 2019 Meeting Papers 1449, Society for Economic Dynamics.
    2. Luis Armona & Andreas Fuster & Basit Zafar, 2019. "Home Price Expectations and Behaviour: Evidence from a Randomized Information Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(4), pages 1371-1410.
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    4. Karl E. Case & Robert J. Shiller & Anne K. Thompson, 2012. "What Have They Been Thinking? Homebuyer Behavior in Hot and Cold Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 265-315.
    5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    6. Adrien Auclert & Bence Bardóczy & Matthew Rognlie & Ludwig Straub, 2021. "Using the Sequence‐Space Jacobian to Solve and Estimate Heterogeneous‐Agent Models," Econometrica, Econometric Society, vol. 89(5), pages 2375-2408, September.
    7. Daniel Greenwald & Adam Guren, 2019. "Do Credit Conditions Move House Prices?," 2019 Meeting Papers 1334, Society for Economic Dynamics.
    8. Javier Bianchi & Alisdair McKay & Neil Mehrotra, 2024. "How Should Monetary Policy Respond to Housing Inflation?," Working Papers 808, Federal Reserve Bank of Minneapolis.
    9. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary policy; housing; heterogeneous agents;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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