Do housing prices decrease when interest rates go up? Housing prices and interest rates: understanding the positive correlation across five countries
DOI:
https://doi.org/10.54097/kr380295Keywords:
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
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
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
