The Housing Supply Channel of Monetary Policy
IMF Working Papers, February 2, 2024
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Bibliographic details
- Authors: Bruno Albuquerque, Martin Iseringhausen, Frederic Opitz
- Published: February 2, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400264498.001
Overview
- Study of the role of regional housing markets in the transmission of US monetary policy using a FAVAR model over 1999q1–2019q4.
- Authors: Bruno Albuquerque, Martin Iseringhausen, Frederic Opitz.
- Publication date: February 2, 2024.
- Series: Working Paper No. 2024/023, Issue: 023, Volume: 2024, Pages: 60.
- DOI: https://doi.org/10.5089/9798400264498.001.
- ISBN: 9798400264498. ISSN: 1018-5941.
Key findings
- There is sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock.
- Part of the regional variation is due to differences in:
- housing supply elasticities,
- household debt overhang,
- housing wealth (volatility).
- House prices and consumption respond more in supply-inelastic states.
- House prices and consumption respond more in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding.
- Financial stability risks increase sharply in areas with large responses, as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets.
- Monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more.
Transmission mechanisms identified
- Housing supply elasticity modulates the pass-through from interest rates to house prices and consumption.
- Housing wealth effects: larger negative housing wealth effects in areas with greater household debt imbalances amplify consumption responses.
- Borrowing constraints: more binding post-shock in high-debt states, reinforcing demand-side declines.
Macrofinancial consequences
- Mortgage delinquencies and foreclosures surge in supply-inelastic and high-debt states following contractionary shocks.
- Banks’ balance sheets worsen in these regions as financial stability risks increase sharply.
Housing tenure and market structure effects
- Stronger impacts on homeownership rates in supply-inelastic states.
- Price-to-rent ratios decline more in supply-inelastic states following contractionary monetary shocks.
Policy implications
- Regional housing supply conditions are important for assessing the macrofinancial effects of rising interest rates.
- Policymakers should account for heterogeneous state-level housing supply elasticities and household debt profiles when evaluating the transmission and financial-stability consequences of monetary policy.
Source: Bruno Albuquerque, Martin Iseringhausen, and Frederic Opitz, "The Housing Supply Channel of Monetary Policy", IMF Working Papers 2024, 023 (2024), February 2, 2024, DOI: https://doi.org/10.5089/9798400264498.001.
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