# The impact of monetary policy on local housing markets: Do regulations matter?

- 110 Downloads

## Abstract

This paper shows that monetary policy has uneven impacts on local housing markets, and that the magnitude of the impacts are correlated with housing supply regulations. We apply the linearized present value model, which allows the log rent–price ratio to be decomposed into the expected present values of all future real interests rates, real housing premia, and real rent growth, to the housing markets in 23 US metropolitan statistical areas. Based on the indirect inference bias-corrected VAR estimates, we find that MSAs that are more regulated have (i) a higher variance in the log rent–price ratio, (ii) a larger share of the variance explained by real interest rate, and (iii) a stronger impulse response of house price to the real interest rate shock.

## Keywords

Present value model Rent–price ratio Housing supply regulations## JEL Classification

E31 G12 R31## Notes

### Acknowledgements

We would like to thank editor Robert Kunst and two anonymous referees for their suggestions. We also thank Charles Leung and Jun Ma for useful comments.

## References

- Ambrose BW, Coulson NE, Yoshida J (2015) The repeat rent index. Rev Econ Stat 97:939–950CrossRefGoogle Scholar
- Ambrose BW, Eichholtz P, Lindenthal T (2013) House prices and fundamentals: 355 years of evidence. J Money Credit Bank 45:477–491CrossRefGoogle Scholar
- Bauer MD, Rudebusch GD, Wu JC (2012) Correcting estimation bias in dynamic term structure models. J Bus Econ Stat 30:454–467CrossRefGoogle Scholar
- Campbell JY, Shiller RJ (1987) Cointegration and tests of present value models. J Polit Econ 95:1062–1088CrossRefGoogle Scholar
- Campbell JY, Shiller RJ (1988) The dividend-price ratio and expectations of future dividends and discount factors. Rev Financ Stud 1:195–228CrossRefGoogle Scholar
- Campbell JY, Vuolteenaho T (2004) Bad beta, good beta. Am Econ Rev 94:1249–1275CrossRefGoogle Scholar
- Campbell SD, Davis MA, Gallin J, Martin RF (2009) What moves housing markets: a variance decomposition of the rent-price ratio. J Urban Econ 66:90–102CrossRefGoogle Scholar
- Davis MA, Lehnert A, Martin RF (2008) The rent-price ratio for the aggregate stock of owner-occupied housing. Rev Income Wealth 54:279–284CrossRefGoogle Scholar
- Engsted T, Pedersen TQ, Tanggaard C (2012) Pitfalls in VAR based return decompositions: a clarification. J Bank Financ 36:1255–1265CrossRefGoogle Scholar
- Engsted T, Tanggaard C (2001) The Danish stock and bond markets: comovement, return predictability and variance decomposition. J Empir Financ 8:243–271CrossRefGoogle Scholar
- Fairchild J, Ma J, Wu S (2015) Understanding housing market volatility. J Money Credit Bank 47:1309–1337CrossRefGoogle Scholar
- Fratantoni M, Schuh S (2003) Monetary policy, housing, and heterogeneous regional markets. J Money Credit Bank 35:557–589CrossRefGoogle Scholar
- Glaeser EL, Gyourko J, Saks RE (2005) Why have housing prices gone up? Am Econ Rev 95:329–333CrossRefGoogle Scholar
- Gourieroux C, Monfort A, Renault E (1993) Indirect inference. J Appl Econom 8:S85–S118CrossRefGoogle Scholar
- Gourieroux C, Renault E, Touzi N (2000) Calibration by simulation for small sample bias correction. In: Mariano R, Schuermann T, Weeks MJ (eds) Simulation-based inference in econometrics: methods and applications. Cambridge University Press, Cambridge, pp 328–358CrossRefGoogle Scholar
- Gyourko J, Saiz A, Summers A (2008) A new measure of the local regulatory environment for housing markets: the Wharton residential land use regulatory index. Urban Stud 45:693–729CrossRefGoogle Scholar
- Himmelberg C, Mayer C, Sinai T (2005) Assessing high house prices: bubbles, fundamentals and misperceptions. J Econ Perspect 19:67–92CrossRefGoogle Scholar
- Leung CKY, Teo WL (2011) Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements. Reg Sci Urban Econ 41:293–304CrossRefGoogle Scholar
- Mayer CJ, Somerville CT (2000) Land use regulation and new construction. Reg Sci Urban Econ 30:639–662CrossRefGoogle Scholar
- Paciorek A (2013) Supply constraints and housing market dynamics. J Urban Econ 77:11–26CrossRefGoogle Scholar
- Saiz A (2010) The geographic determinants of housing supply. Q J Econ 125:1253–1296CrossRefGoogle Scholar
- Saks RE (2008) Job creation and housing construction: constraints on metropolitan area employment growth. J Urban Econ 64:178–195CrossRefGoogle Scholar
- Smith AA (1993) Estimating nonlinear time-series models using simulated vector autoregressions. J Appl Econom 8:S63–S84CrossRefGoogle Scholar