Do housing prices decrease when interest rates go up? Housing prices and interest rates: understanding the positive correlation across five countries

Authors

  • Sissi Stahlecker

DOI:

https://doi.org/10.54097/kr380295

Keywords:

Interest rates; housing prices; central banks; monetary policies.

Abstract

This paper investigates the relationship between changes in interest rate and house prices from the period 1975 to 2023 in five countries: United States, United Kingdom, China, Germany and Indonesia. Results show that contrary to the paradigm of real estate pricing, housing prices increase with interest rates. Furthermore we find that changes in house prices are independent of monetary policies and interest rate changes set by the central bank. Economically developed nations exhibit a stronger correlation between the two variables. We demonstrate that this is due to the 2008 financial crisis, where houses fell by nearly 30%, creating a fear of recession and the resulting policy of low interest rates to encourage investment.

Downloads

Download data is not yet available.

References

AMRO Asia. (2021, July 22). Cooling Down the Housing Market in China. ASEAN+3 Macroeconomic Research Office. https://amro-asia.org/cooling-down-the-housing-market-in-china/

Bank Indonesia. (2024). Bank Indonesia. https://www.bi.go.id/en/Default.aspx.

Bank of England. (2024). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/economics/what-is-bank-of-england-boe/

European Central Bank (ECB). (2021). Monetary policy decisions. European Central Bank. https://www.ecb.europa.eu/mopo/decisions/html/index.en.html

BankUnderground. (2023, June 27). How house prices respond to interest rates depends on where they are in the country. Bank Underground. https://bankunderground.co.uk/2023/06/27/how-house-prices-respond-to-interest-rates-depends-on-where-they-are-in-the-country/

Beraldi, F., & Zhao, Y. (2023). The Pricing-Out Phenomenon in the U.S. Housing Market. International Monetary Fund (IMF). https://www.imf.org/en/Publications/WP/Issues/2023/01/06/The-Pricing-Out-Phenomenon-in-the-U-S-527856

Board of Governors of the Federal Reserve System. (2009). Crisis response. Federal Reserve Board. https://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm

Ca' Zorzi, M., Dedola, L., Georgiadis, G., Jarociński, M., Stracca, L., & Strasser, G. (2020). Monetary policy and its transmission in a globalised world. European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2407~586c50e03f.en.pdf

Canzoneri, M. B., & Dellas, H. (1998). Real interest rates and central bank operating procedures. Journal of Monetary Economics, 42(3), 471–494. https://doi.org/10.1016/s0304-3932(98)00033-6

Deutsche Bundesbank. (2010). Central bank of the Federal Republic of Germany. Bundesbank.de. https://www.bundesbank.de/en/tasks/central-bank-of-the-federal-republic-of-germany-626946

Coffee, J. C. (2009). What Went Wrong? An Initial Inquiry into the Causes of the 2008 Financial Crisis. Journal of Corporate Law Studies, 9(1), 1–22. https://doi.org/10.1080/14735970.2009.11421533

Connolly, E., & Kohler, M. (2004). News and Interest Rate Expectations: A Study of Six Central Banks. Reserve Bank of Australia. https://www.rba.gov.au/publications/confs/2004/connolly-kohler.html

Dieckelmann, D., Hempell, H. S., Jarmulska, B., Lang, J. H., & Rusnák, M. (2023). House Prices and Ultra-Low Interest Rates: Exploring the Non-Linear Nexus. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4368835

Element Homes. (2022). Why Real Estate as an Inflation Hedge is the best investment. Construct Elements. https://www.constructelements.com/post/real-estate-as-an-inflation-hedge-why-its-the-best-investment

Emmerson, C., & Tetlow, G. (2015). UK Public Finances: From Crisis to Recovery. Fiscal Studies, 36(4), 555–577. https://www.jstor.org/stable/26604931

Epstein, G. (2007). Institutional Change and Economic Development. Anthem Press. https://books.google.com.ph/books?hl=en&lr=&id=Nq41DgAAQBAJ&oi=fnd&pg=PA95&dq=effects+of+central+banks+in+different+countries&ots=goQlLRXRkO&sig=IAJzn1p5TI3Q8xA1GGd0DgrSsag&redir_esc=y

Federal Reserve. (2023). Federal Reserve Board - Home. Federalreserve.gov. https://www.federalreserve.gov/

Friedman, B. M., & Kuttner, K. N. (2010, January 1). Implementation of monetary policy: How do central banks set interest rates? ScienceDirect; Elsevier. https://www.sciencedirect.com/science/article/abs/pii/B9780444534545000128

Gimeno, R., & Martínez-Carrascal, C. (2010). The relationship between house prices and house purchase loans: The Spanish case. Journal of Banking & Finance, 34(8), 1849–1855. https://doi.org/10.1016/j.jbankfin.2009.12.011

Goodman, L., & Neal, M. (2022, May 2). How Higher Mortgage Rates Have Historically Affected Home Prices. Urban Institute. https://www.urban.org/urban-wire/how-higher-mortgage-rates-have-historically-affected-home-prices

Investopedia Team. (2021). Consumer Confidence: A Killer Statistic. Investopedia. https://www.investopedia.com/articles/fundamental/103002.asp

Kneeshaw, J. T., & Bergh, P. V. den. (1985). International interest rate relationships: policy choices and constraints. Bank for International Settlements. https://www.bis.org/publ/econ13.htm

Lesch, H., Vogel, S., & Hellmich, P. (2017). The State and social partners working together: Germany’s response to the global financial and economic crisis. International Labour Organization. https://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/---dialogue/documents/publication/wcms_566338.pdf

Li, S., Wang, Y., Zhang, Z., & Zhu, Y. (2022, March 26). Research on the Factors Affecting Stock Price Volatility. Atlantis Press. https://doi.org/10.2991/aebmr.k.220307.469

McQuinn, K., & O’Reilly, G. (2008). Assessing the role of income and interest rates in determining house prices. Economic Modelling, 25(3), 377–390. https://doi.org/10.1016/j.econmod.2007.06.010

Muellbauer, J., Murphy, A., & Duca, J. (2021). What drives house prices: Lessons from the literature? Centre for Economic Policy Research. https://cepr.org/voxeu/columns/what-drives-house-prices-lessons-literature

Natálie, D. (2023). Monetary policy of the Chinese central bank. Czech National Bank. https://www.cnb.cz/en/about_cnb/cnblog/cnBlog-Monetary-policy-of-the-Chinese-central-bank/

Norland, E. (2018). High Consumer Confidence: Cause for Concern or Celebration? CME Group. https://www.cmegroup.com/education/featured-reports/high-consumer-confidence-cause-for-concern-or-celebration.html

Pambudi, S., Ismail, M., & Kaluge, D. (2019). THE TRANSMISSION MECHANISM OF MONETARY POLICY CHANNELS INTEREST RATE PASS THROUGH IN INDONESIA. International Journal of Business, Economics and Law, 18. https://ijbel.com/wp-content/uploads/2019/07/ijbel5-VOL18_303.pdf

Parkin, M., & Bade, R. (1978). Central Bank Laws and Monetary Policies: A Preliminary Investigation. University of Western Ontario. https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1548&context=economicsresrpt

People's Bank of China. (2020). Pbc.gov.cn. http://www.pbc.gov.cn/en/3688006/index.html

Rodhe, J. (2023). Is Real Estate Really an Inflation Hedge? What History Says? Concreit. https://www.concreit.com/blog/real-estate-inflation-hedge

Steil, B. (2011). Global Monetary Policy Tracker. Council on Foreign Relations. https://www.cfr.org/global/global-monetary-policy-tracker/p37726

Sutton, G. D., Mihaljek, D., & Subelyte, A. (2017). Interest Rates and House Prices in the United States and Around the World. SSRN Electronic Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3052374

Thee, K. W. (2012). The Impact of the Global Financial Crisis on the Indonesian Economy and the Prospects for the Resumption of Rapid and Sustained Growth. Cambridge University Press; ISEAS–Yusof Ishak Institute. https://www.cambridge.org/core/books/abs/indonesias-economy-since-independence/impact-of-the-global-financial-crisis-on-the-indonesian-economy-and-the-prospects-for-the-resumption-of-rapid-and-sustained-growth/E911E0A3217EDE82582106984AEC1C41

US Bank. (2022, November 28). The Impact of Rising Interest Rates on the Housing Market. U.S. Bank. https://www.usbank.com/investing/financial-perspectives/investing-insights/interest-rates-impact-on-housing-market.html

Weeken, O. (2005, April 12). Asset Pricing and the Housing Market. SSRN Electronic Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=701272

What is the relationship between interest rates and house prices? How does one affect the other? (2019). Quora. https://www.quora.com/What-is-the-relationship-between-interest-rates-and-house-prices-How-does-one-affect-the-other

Yueh, L. (2010). Finance and Development. International Monetary Fund. https://www.imf.org/external/pubs/ft/fandd/2010/06/yueh.htm

Downloads

Published

16-06-2024

How to Cite

Stahlecker, S. (2024). Do housing prices decrease when interest rates go up? Housing prices and interest rates: understanding the positive correlation across five countries. Highlights in Business, Economics and Management, 35, 332-342. https://doi.org/10.54097/kr380295