Non-Linearities in the Relationship between House Prices and Interest Rates: Implications for Monetary Policy

Guay Lim and Sarantis Tsiaplias

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: Understanding the impact of changes in interest rates on house prices is important for managing house price bubbles and ensuring housing affordability. This paper investigates the effect of interest rates on regional house price to income measures based on a non-linear smooth transition VAR model of inter-regional house price dynamics. To minimize the impact of housing mix changes on estimated effects, we apply the model to an Australian dataset of regional hedonic house price indices that account for both changes in housing mix and quality over time. The empirical analysis provides evidence that house price to income ratios depend non-linearly on interest rates, and moreover that there is an interest rate ‘transition point’ below which a house price bubble is probable. We investigate the implications for monetary policy of stable and unstable house price regimes and propose a housing lending rate lower bound that achieves long-run house price stability in the presence of regime uncertainty. To check the generality of the result, we also apply the model to aggregate Australian and US data.

Keywords: House prices; interest rates; monetary policy; nonlinear VAR; housing affordability; bubbles (search for similar items in EconPapers)
JEL-codes: C30 E43 E52 G21 R10 R31 (search for similar items in EconPapers)
Pages: 37pp
Date: 2016-01
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Interest Rates, Local Housing Markets and House Price Over†reactions (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2016n02

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