The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets in Australia

Abstract

The effect of monetary policy on housing prices varies significantly across local housing markets. This heterogeneity across local housing markets can be partly explained by variation in housing supply conditions—housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. The fact that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas indicates that lower (higher) interest rates increase (decrease) housing wealth inequality. However, the effects of monetary policy on housing wealth inequality appear to be temporary. Other factors also explain the variation in sensitivity to monetary policy across local housing markets with the sensitivity being greater in areas in which incomes are relatively high, households are more indebted and there are more housing investors. This suggests that the sensitivity of housing prices to monetary policy is state dependent.

House Prices, Monetary Policy and Commodities: Evidence from Australia*

“…They also suggest that house prices are more sensitive to monetary policy in markets with tighter housing supply conditions, higher average incomes, larger mortgage debts and a greater number of property investors. 10 Our paper differs from La Cava and He (2021) in several dimensions. First, we use instrumental variables methods to identify the effects of our shocks.…”

“…The commodity price shock represents the average of all the state commodity price shocks. Source: Authors' calculations using data from ABS and La Cava and He (2021)…”

“…See, e.g., Milunovich (2020 Little prior work uses the highly geographically disaggregated Australian data adopted in the current paper to study heterogeneous effects across housing markets. However, La Cava and He (2021) makes progress in this direction. They use house prices measured at the Statistical Area 3 level along with local projection methods to study the effects of monetary policy across local housing markets.…”

“…The commodity price shock represents the average of all the state commodity price shocks. Source: Authors' calculations using data from ABS and La Cava and He (2021) because fluctuations in the price of imports may have cost effects on housing demand. That is, higher import prices reduce the purchasing power of Australian households, which would decrease housing demand and therefore house prices.…”

“…One concern about the validity of the instruments is that many narratively identified monetary policy shocks in the literature appear to display significant serial correlation (Alloza et al ., 2019). To address this concern, in Appendix we report a range of serial correlation tests for the La Cava and He (2021) monetary shocks but find no evidence of this problem.…”