{ "title": "Housing Markets and Monetary Policy", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi", "canonical": "https://www.imf.org/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi", "overlayPath": "/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/index.md", "summary": "Comprehensive, country-specific understanding of housing and mortgage markets can help calibrate monetary policy", "sections": [ { "heading": "Overview", "content": "- 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.\n- 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.\n- The analysis summarized here is drawn from a chapter of the IMF’s April 2024 World Economic Outlook." }, { "heading": "Housing channel", "content": "- Housing is central to private sector balance sheets: mortgages are often the largest household liability and housing the most significant form of wealth.\n- 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.\n\n- Identified household demand–related transmission channels:\n - 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).\n - 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.\n - 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)." }, { "heading": "Transmission potency: cross-country determinants", "content": "- Key housing and mortgage market characteristics determine the strength of housing-related transmission:\n - 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.\n - Household indebtedness: countries where more households have debt and higher borrowing amounts see stronger effects from policy-rate changes.\n - Housing supply constraints: more restricted supply amplifies transmission because lower rates raise demand and constrained supply pushes up prices, boosting wealth and consumption.\n - 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.\n\n- Cross-country variation example:\n - 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.\n\n- Empirical finding:\n - Policy has greater effects on economic activity in countries where the share of fixed-rate mortgages is low." }, { "heading": "Weaker transmission since the global financial crisis and the pandemic", "content": "- Mortgage and housing market shifts that have weakened or delayed some transmission channels:\n - Effective mortgage rates fell to multidecade lows as households secured low-cost loans in the 2010s and early 2020s.\n - Average mortgage maturity increased and the share of fixed-rate mortgages rose in many countries.\n - Macroprudential tightening after the global financial crisis improved creditworthiness and reduced leverage.\n - The pandemic prompted population shifts away from city centers toward areas with more supply.\n\n- Net effect:\n - Transmission strengthened in some economies (fewer fixed-rate mortgages, higher debt levels, constrained supply) and weakened in others (movement in the opposite direction).\n - 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." }, { "heading": "Loosening cycles and asymmetries", "content": "- Housing and mortgage channels operate in tightening and loosening phases; transmission in an easing cycle depends on the same country-specific characteristics.\n- 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).\n- 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).\n\n- Current easing cycle distinguishing features:\n - Household finances in advanced economies are stronger than after the global financial crisis and sometimes relative to the prepandemic period.\n - No significant increase in household default rates has occurred.\n - Historically high share of fixed-rate mortgages as a proportion of outstanding debt can alter transmission:\n - Fixed-rate mortgages typically dampen transmission in tightening cycles but can activate a refinancing channel in loosening cycles (Eichenbaum, Rebelo, and Wong).\n - 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.\n\n- Quantitative example (United States):\n - The average rate for all outstanding mortgages was 3.9 percent as of late 2024.\n - The average for new 30-year fixed loans was 6.7 percent.\n - 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.\n\n- Other determinants of easing transmission:\n - Relative speed and strength of the loosening impulse.\n - Pass-through of monetary policy to lending rates.\n - Government fiscal stance.\n - Supply-side factors, such as the cost of materials." }, { "heading": "Policy implications and recommendations", "content": "- Central banks should closely monitor housing and mortgage markets to best calibrate monetary policy because housing is a key component of the transmission mechanism.\n- Specific monitoring and policy calibration suggestions:\n - Track the share of fixed-rate versus adjustable-rate mortgages to assess the potency of the cash-flow channel.\n - Monitor household debt levels and debt-servicing ratios to identify early signs of overtightening when transmission is strong.\n - Assess housing supply constraints and price valuation measures to anticipate amplified transmission and wealth effects.\n - In loosening cycles, consider the prevalence of historically low fixed-rate mortgages that could inhibit refinancing, thereby muting the refinancing channel.\n - Combine monetary policy assessment with fiscal stance and supply-side constraints to evaluate overall transmission to the real economy.\n\nMehdi Benatiya Andaloussi; Nina Biljanovska; Alessia De Stefani — IMF authors\n\n---\n\n Content in this bundle\n\n- Housing Markets and Monetary Policy\n - Housing Markets and Monetary Policy (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Housing Markets and Monetary Policy (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/bundle-manifest.json)", "Authors: MEHDI BENATIYA ANDALOUSSI, NINA BILJANOVSKA, ALESSIA DE STEFANI", "Published: December 3, 2024", "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 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:", "Key housing and mortgage market characteristics determine the strength of housing-related transmission:", "Cross-country variation example:", "Empirical finding:", "Mortgage and housing market shifts that have weakened or delayed some transmission channels:", "Net effect:", "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:", "Quantitative example (United States):", "Other determinants of easing transmission:", "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:", "**Housing Markets and Monetary Policy**" ], "related": [ { "title": "Housing Markets and Monetary Policy", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2024/12/andaloussi.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2024/12/andaloussi.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/fandd/article/2024/12/andaloussi.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/index.md", "json": "/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/index.json", "bundleManifest": "/en/publications/fandd/issues/2024/12/housing-markets-and-monetary-policy-mehdi-andaloussi/bundle-manifest.json" }, "generatedAtUtc": "2026-09-15T19:35:51.302Z" }