House Prices Case Study

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Previous studies have discussed the role of interest rates in determining house price. The majority of these papers identify interest rates as the most important explanatory variable. One early study is Abraham and Hendershott (1992). Using pooled cross-sectional data on metropolitan house prices in the US between 1977 and 1991, they find that macroeconomic factors including interest rates and employment are significant in influencing house prices. Iacoviello and Minetti (2003) argue that, over time, house prices became more sensitive to interest rate changes due to financial liberalisation in European countries including the UK. More recently, this sentiment is shared by Himmelberg et al. (2005), who show the importance of interest rates to…show more content…
They find that interest rate effects dominate the influence of local house price innovations in the core economic regions in Sweden. Harris (1989) examines the effect of real interest rates on house prices and finds that the real interest rate is an important mechanism affecting change in house price levels. Apergis and Rezitis (2003) study the effects of specific macroeconomic factors on house prices in Greece, i.e. inflation, employment, money supply and the mortgage interest rate. Their results, derived by means of variance decomposition analysis, suggest that all the variables under consideration affect house prices, with the mortgage interest rate having the largest explanatory power. Campbell, Davis, Gallin and Martin (2009) find that the expected net present value of the risk premium for housing and the risk-free rate of interest are negatively correlated implies that the link between the level of house prices and real interest rates is more complex than these interpretations of history suggest. Their results provide evidence that changes in risk-free interest rates may not have done much to change housing valuations over the 1975–2007…show more content…
These studies find that monetary policies play a significant role in controlling house prices or house price bubbles. Maclennan et al. (2000) find that monetary policy may be transmitted through the housing market. The main direct effect is an income or cash flow effect: when the interest rate rises, the interest burden of any outstanding debt rises and after-housing-costs disposable income falls. Xu and Chen (2012) find that China monetary policy actions are the key driving forces behind the change of real estate price growth in China. Their empirical results show that expansionary monetary policy tends to accelerate the subsequent home price growth, while restrictive monetary policy tends to decelerate the subsequent home price growth. Iacoviello and Neri (2010) find that while monetary policy played a minor role in the run-up of house prices, it accounted for the entire reversal of house prices from 2005 to 2006. Negro and Otrok (2005) study the effects of monetary policy on regional housing price in American. They explain the heterogeneity across states in the current house prices by the different exposures to national shocks. They find significant regional difference in the response of house price to monetary policy measured by Federal Funds rate but monetary policy shocks are small relative to the size of recent price boom in their study. Allen and Carletti (2010) find that interest rates can be used as an
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