MONETARY POLICY & REAL ESTATE

Do Monetary Policies influence the Real Estate Market?

What implications does it have in the overall economy?
What have we done and what can we do?
WHAT IS MONETARY POLICY?
ACTIONS a CENTRAL BANK takes to influence a Country’s MONEY SUPPLY and the OVERALL ECONOMY

Optimum
1 Buying and selling treasuries in the open market

BUY SELL
2 Setting Interest Rates
3 Establishing Reserve Requirements
Basic Banking System

$
$

$i $i
 8 - 17%
Laborous
Chemical
Real Economic
Cement
Growth
Designers

Furniture
Raw Materials
Construction Designers
5- 10% Total
Output of the
Economy
Iron + 4 - 5% Total
Steel Employment

Real Brokers
Estate
Architects

Engineers

Retail
Investors Industry
Renters
REAL HOUSE PRICES

Peak-to-trough recession
REAL HOUSE PRICES
REAL HOUSE PRICES; CONCLUSIONS

Source: The Bank for International Settlements

- Real house prices RISE 28% over the five years BEFORE a PEAK and FALL 22% in the five years AFTER a
PEAK
-

- Real House Prices are pro-cyclical

- In these countries a recession occurred after the peak in real house prices
- Changes in house prices are correlated across countries. Global factors (such as low real interest rates,
global business cycles & exchange rates) are important determinants of house price cycles
- Rapid price increases was followed by real house price declines
 REAL HOUSE PRICES & POLICY INTEREST RATES
To explore the interaction of house prices with other elements of the economic environment, we studied the behavior
of key financial and macroeconomic indicators around the times of peaks in house prices
Peak
-Run-up in Real House
Prices is associated with
declines in Policy
Interest Rates

-Around 1.5 years before

the peak, rates begin to
move up

-One year after house

prices have peaked,
policy rates turn down,
falling more than 4
percentage points over
the next 3 years or so

House Prices and Monetary Policy: A Cross-Country Study

Alan G. Ahearne, John Ammer, Brian M. Doyle, Linda S. Kole, and Robert F. Martin
REAL HOUSE PRICES & CPI INFLATION
Peak
-CPI inflation begins to pick
up about 1 year before the
house price peak

-Continues to move higher

even after house prices have
turned down

-Topping out around 1 year

after

-Inflation then eases

noticeably, ending up several
percentage points below its
initial value by year 5.

House Prices and Monetary Policy: A Cross-Country Study

Alan G. Ahearne, John Ammer, Brian M. Doyle, Linda S. Kole, and Robert F. Martin
REAL HOUSE PRICES & GDP + CONSUMPTION GROW

-Real GDP growth is “stable”

during most of the upswing in
house prices

-Growth begins to drop

markedly shortly before the
peak

-Bottoms out at a small

negative rate about a year
after the peak

-Growth then starts to trend

up, returning to near its
pre-peak pace by year 5

House Prices and Monetary Policy: A Cross-Country Study

Alan G. Ahearne, John Ammer, Brian M. Doyle, Linda S. Kole, and Robert F. Martin
CONCLUSIONS
M then P then H then Y
M: Monetary expansion
P: Price
H: Housing expenditure
Y: Aggregate demand

Demand-side Effects
• If credit is cheaper, people will have more access to loans,
particularly mortgages. Demand for Houses will grow
• Therefore prices $ will go up

Supply-side Effects
• If credit is cheaper, developers will lower their costs,
expanding investment in Real Estate.
• Therefore the number of new buildings will rise
CONCLUSIONS

- House prices are influenced by interest rates

- Housing market is a key channel of monetary policy transmission
- House prices are highly pro-cyclical
- Sharp movements in house prices need to be taken into account by central banks for financial stability
also
- Low interest rates, ample liquidity and financial deregulation are usually present in house price rises
- House price swings can have important implications for economic activity and inflation
- Rapidly rising house prices seem to have coincided with overheating domestic demand and at times
may have indicated that a turning point was imminent
- Difficult for CB to identify asset price bubbles, since they have become unhinged from economic
fundamentals
WHAT CAUSED THE FINANCIAL CRISIS?
● Monetary excesses
● Low interest rates for too long
● House prices were rising quicker than the interest rate. 15% a
year vs 1% interest rate. Why not buy more houses?
● With such low interest rates a house boom was created, that
lead then to a housing bust

SOURCE: THE FINANCIAL CRISIS AND THE POLICY RESPONSES: AN EMPIRICAL ANALYSIS OF WHAT
WENT WRONG
John B. Taylor. Page. 7
DOCUMENT ABOUT EMPIRICAL RESEARCH

● Spain had the largest housing boom in Europe

● Governments caused, prolonged and worsened the
crisis by deviating from what history had told were
good policies (Tylor Rule)
● Housing boom and bust lead into delinquencies and
foreclosures
● When house prices started to raise, the risk also
raised
● As prices went down, people lost motivation to pay