Monetary transmission through the housing sector

Daniel Albuquerque (), Thomas Lazarowicz () and Jamie Lenney ()
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Daniel Albuquerque: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Thomas Lazarowicz: University College, London
Jamie Lenney: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1115, Bank of England working papers from Bank of England

Abstract: The simultaneous rise in housing rents and interest rates over 2022–24 brought scrutiny to the interaction between monetary policy and the housing market. We start by providing evidence on this interaction using data from the United Kingdom and a high frequency identification. Our main empirical finding is that house prices and rents do not move together after an increase in interest rates. House prices fall strongly but gradually, reaching their trough after one year, while nominal rents are stable for one to two years, before eventually falling. Next, we develop a quantitative Heterogeneous Agent New Keynesian model that includes housing and rental sectors. In particular, we model individual landlords as the marginal providers of rental housing. We use the model to examine the housing channel of monetary policy where we find: (1) the housing channel is large and falls disproportionality on mortgagors; (2) deviations from rational expectations mean landlords largely fail to pass on mortgage costs and act more like wealthy hand to mouth; (3) these behavioural biases dampen the potential trade-off between prices and output induced by the rental market; and (4) that it may be optimal for monetary policy makers to look through and accommodate housing supply shocks.

Keywords: Monetary policy; housing; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D31 E21 E52 R21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2025-02-14
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1115

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