The Effect of Monetary Policy on House Prices - How Strong is the Transmission?

In the current long-lasting period of low interest rates and overheating housing markets, the discussion of the effect of monetary policy on house prices has arisen again. We examine the broad empirical literature on this topic. We collect 1,447 estimates of the effect of changes in short-term interest rates on house prices. These estimates come from 31 studies and are drawn from vector autoregression models. On average, an increase in the interest rate by one percentage point causes a median decrease in house prices of 0.7 percent for the one-year horizon and 0.9 percent for the two-year horizon. Moreover, we show that at the medium-term (monetary policy) horizon, the effect of monetary policy remains significant after correcting for the publication bias present in the literature. In addition, we collect more than 40 control variables. These capture, first, the context in which the estimates were obtained, and, second, the characteristics of the economies in question. Within both groups of variables we identify several significant aspects explaining differences in the estimates reported in the literature. The most prominent drivers of the heterogeneity are the use of sign restrictions, the inclusion of additional endogenous variables in VAR models, and the level of indebtedness.