RDP 2020-02: The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets 7. Conclusion

We document a wide distribution in the effect of monetary policy across local housing markets. Looking into this distribution, we find evidence that these differences in local housing price responses to monetary policy are partially explained by factors such as housing supply conditions, mortgage debt, investor concentration and average income. This speaks to the underlying transmission of monetary policy and suggests that the effectiveness of monetary policy through the housing market is dependent on the state of the economy. Specifically, monetary policy could have larger effects on housing prices when supply constraints are binding, mortgage debt is higher, there are more investors and incomes are higher, all other things being equal. And while the estimates are not causal in nature, the results do suggest that it is important to account for a wide range of factors when analysing the effects of monetary policy on housing market dynamics.

We also explore how monetary policy effects the distribution of housing wealth. Our results show that housing prices in the most expensive areas are the most sensitive to interest rate changes, indicating that monetary policy can change the distribution of housing wealth. We find some evidence that the available supply of land partly explains this result. Our results also suggest that the distributional effects on housing wealth are temporary, with the effects of monetary policy across the price distribution converging over time.