## HOUSING MARKETS AND MONETARY POLICY

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**Canonical URL:** [HOUSING MARKETS AND MONETARY POLICY](https://www.imf.org/-/media/files/publications/fandd/article/2024/12/andaloussi.pdf)

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### Overview
- Central banks began the steepest and most coordinated series of interest rate hikes in four decades in late 2021.
- Many economies held up relatively well despite the hikes; housing and mortgage characteristics are a key factor explaining cross-country differences in monetary policy transmission.
- Housing is central to private sector balance sheets: mortgages are often the largest household liability and housing the most significant form of wealth; real estate affects consumption, investment, employment, consumer prices, and bank exposures.

### Transmission channels through housing and mortgages
- Cash-flow channel:
  - Policy rate changes directly affect monthly mortgage payments for homeowners with adjustable-rate mortgages, depressing disposable income and sometimes consumption.
- Expectations / risk premium channel:
  - Home prices are sensitive to interest rates via evolving discount rates and expectations about future returns, affecting borrowing demand and housing prices.
- Wealth and collateral channel:
  - Property price fluctuations change homeowners’ wealth and the volume of collateralized credit, thereby affecting consumption.

### Cross-country variation and transmission potency
- Key mortgage-market characteristics determine channel strength:
  - The relative strength of the cash-flow channel is determined by the share of fixed-rate mortgages outstanding.
  - Transmission is stronger where more households have debt and higher amounts of borrowing.
  - Transmission is stronger when housing supply is more restricted and where home prices are overvalued, as tighter supply or overvaluation amplifies price responses and associated wealth effects.
- Exact cross-country differences highlighted:
  - The share of fixed-rate mortgages outstanding can vary from close to zero in South Africa to more than 95 percent in Mexico and the United States.
- Empirical finding:
  - Policy has greater effects on economic activity in countries where the share of fixed-rate mortgages is low; in countries with a large share of fixed-rate mortgages, changes in policy rates affect monthly payments for fewer households and aggregate consumption tends to be less affected.

### How markets have changed since the global financial crisis and pandemic
- Prior to and during the postpandemic tightening cycle:
  - Effective mortgage rates in many countries had fallen to multidecade lows as households secured low-cost loans in the 2010s and early 2020s.
  - The average maturity of mortgages increased and the share of fixed-rate mortgages rose in many countries.
- Macroprudential tightening by financial supervisors after the global financial crisis:
  - Policies aimed to limit risky housing lending, improving creditworthiness and reducing leverage by 2020.
- Pandemic-driven shifts:
  - Movement away from city centers increased available supply in some areas.
- Net effect on transmission:
  - These shifts weakened or delayed some monetary policy transmission channels in several countries; transmission strengthened in others (fewer fixed-rate mortgages, higher debt levels, constrained supply) and weakened in others (opposite changes).

### Loosening cycles and asymmetries
- Housing channels operate in both tightening and loosening phases; country-specific characteristics determine effects in easing cycles as well.
- Historical asymmetry:
  - Tightening episodes are generally more powerful in restraining booms than similar-size loosening episodes are in stimulating demand.
  - Large coordinated loosenings have sometimes been followed by global recessions when weakened private sector balance sheets prolonged slumps despite easing.
- Current loosening cycle differences:
  - Household finances in advanced economies are stronger than during years after the global financial crisis and sometimes relative to the prepandemic period.
  - There hasn’t been a significant increase in household default rates.
  - A historically high share of fixed-rate mortgages exists as a proportion of outstanding debt.
- Refinancing channel and current frictions:
  - High shares of fixed-rate mortgages typically reduce tightening transmission but permit a refinancing channel in a loosening cycle.
  - Many borrowers locked in historically low fixed rates during the 2010s and the pandemic; these mortgages may remain well below current rates despite monetary easing.
  - United States example: the average rate for all outstanding mortgages was 3.9 percent as of late 2024, while the average for new 30-year fixed loans was 6.7 percent; mortgage rates would have to decline about 3 percentage points for the average borrower with a fixed-rate loan to have an incentive to refinance.
  - Consequently, many homeowners may remain locked in despite lower borrowing costs, with important consequences for spending and house prices.

### Policy implications and recommendations
- Central banks should develop a deep, country-specific understanding of housing and mortgage markets to calibrate monetary policy effectively.
- Policy monitoring and calibration:
  - In countries where transmission through housing channels is strong, monitoring housing market developments and changes in household debt-servicing ratios can help identify early signs of over-tightening.
  - In countries where monetary policy transmission is weaker, policymakers can consider more forceful early action when signs of inflationary or deflationary pressures first emerge.
- Consideration of multiple factors:
  - The degree of transmission of any easing cycle to the real economy also depends on: the relative speed and strength of the loosening impulse; the pass-through of monetary policy to lending rates; the government’s fiscal stance; and supply-side factors such as the cost of materials.

*Source: "HOUSING MARKETS AND MONETARY POLICY," by Mehdi Benatiya Andaloussi, Nina Biljanovska, and Alessia De Stefani, F&D, December 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/12/andaloussi.pdf_