Housing Markets and Monetary Policy

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Bibliographic details

• Authors: MEHDI BENATIYA ANDALOUSSI, NINA BILJANOVSKA, ALESSIA DE STEFANI
• Published: December 3, 2024

Overview

• Central banks in late 2021 kicked off the steepest and most coordinated series of interest rate hikes in four decades to contain the postpandemic inflation outbreak.
• Many economies held up relatively well despite expectations of a sharp global slowdown; differences in housing and mortgage characteristics are a key reason for heterogeneous effects across countries.
• The analysis summarized here is drawn from a chapter of the IMF’s April 2024 World Economic Outlook.

Housing channel

• 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 accounts for a large share of consumption, investment, employment, and consumer prices in most economies, and banks/financial intermediaries are often heavily exposed to the housing sector—making housing a key component of monetary policy transmission.

• Identified household demand–related transmission channels:
  • Cash-flow channel: policy rate changes directly affect monthly mortgage payments for homeowners with adjustable-rate mortgages, depressing disposable income and sometimes consumption (research by Marco Di Maggio and others).
  • Expectations/risk premium channel: home prices are sensitive to interest-rate changes via evolving discount rates and expectations about future returns, affecting borrowing willingness and housing prices.
  • Wealth and collateral channel: property price movements change homeowners’ wealth and the volume of collateralized credit, influencing consumption (work by Atif Mian and Amir Sufi).

Transmission potency: cross-country determinants

• Key housing and mortgage market characteristics determine the strength of housing-related transmission:
  • Share of fixed-rate mortgages: a higher share reduces the strength of the cash-flow channel because fixed-rate loans do not adjust to policy-rate changes.
  • Household indebtedness: countries where more households have debt and higher borrowing amounts see stronger effects from policy-rate changes.
  • Housing supply constraints: more restricted supply amplifies transmission because lower rates raise demand and constrained supply pushes up prices, boosting wealth and consumption.
  • Prior overvaluation: where home prices have been overvalued and accompanied by excessive borrowing, rising rates can lead to foreclosures, falling prices, lower incomes, and less consumption.

• Cross-country variation example:
  • 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.

Weaker transmission since the global financial crisis and the pandemic

• Mortgage and housing market shifts that have weakened or delayed some transmission channels:
  • Effective mortgage rates fell to multidecade lows as households secured low-cost loans in the 2010s and early 2020s.
  • Average mortgage maturity increased and the share of fixed-rate mortgages rose in many countries.
  • Macroprudential tightening after the global financial crisis improved creditworthiness and reduced leverage.
  • The pandemic prompted population shifts away from city centers toward areas with more supply.

• Net effect:
  • Transmission strengthened in some economies (fewer fixed-rate mortgages, higher debt levels, constrained supply) and weakened in others (movement in the opposite direction).
  • Deep, country-specific understanding of housing and mortgage markets is important to calibrate monetary policy: monitor housing developments and household debt-servicing ratios where housing-channel transmission is strong; consider more forceful early action where transmission is weak.

Loosening cycles and asymmetries

• Housing and mortgage channels operate in tightening and loosening phases; transmission in an easing cycle depends on the same country-specific characteristics.
• Historical asymmetry: tightening episodes are generally more powerful in restraining booms than similar-size loosening episodes are in stimulating demand (research by Silvana Tenreyro and Gregory Thwaites).
• Recent loosening cycles were often followed by global recessions when weakened private sector balance sheets prolonged slumps despite monetary easing (research by Atif Mian, Kamalesh Rao, and Amir Sufi).

• Current easing cycle distinguishing features:
  • Household finances in advanced economies are stronger than after the global financial crisis and sometimes relative to the prepandemic period.
  • No significant increase in household default rates has occurred.
  • Historically high share of fixed-rate mortgages as a proportion of outstanding debt can alter transmission:
  • Fixed-rate mortgages typically dampen transmission in tightening cycles but can activate a refinancing channel in loosening cycles (Eichenbaum, Rebelo, and Wong).
  • However, 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, reducing incentives to refinance.

• Quantitative example (United States):
  • The average rate for all outstanding mortgages was 3.9 percent as of late 2024.
  • 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.

• Other determinants of easing transmission:
  • Relative speed and strength of the loosening impulse.
  • Pass-through of monetary policy to lending rates.
  • Government fiscal stance.
  • Supply-side factors, such as the cost of materials.

Policy implications and recommendations

• Central banks should closely monitor housing and mortgage markets to best calibrate monetary policy because housing is a key component of the transmission mechanism.
• Specific monitoring and policy calibration suggestions:
  • Track the share of fixed-rate versus adjustable-rate mortgages to assess the potency of the cash-flow channel.
  • Monitor household debt levels and debt-servicing ratios to identify early signs of overtightening when transmission is strong.
  • Assess housing supply constraints and price valuation measures to anticipate amplified transmission and wealth effects.
  • In loosening cycles, consider the prevalence of historically low fixed-rate mortgages that could inhibit refinancing, thereby muting the refinancing channel.
  • Combine monetary policy assessment with fiscal stance and supply-side constraints to evaluate overall transmission to the real economy.

Mehdi Benatiya Andaloussi; Nina Biljanovska; Alessia De Stefani — IMF authors

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