Monetary Policy and Housing Overvaluation
Monetary Policy and Housing Overvaluation
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Volume/Issue:
Volume 2025
Issue 207
Publication date: October 2025
ISBN: 9798229027779
$20.00
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Topics covered in this book
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Banks and Banking , Economics- Macroeconomics , Monetary Policy , Overvalued Housing Markets , House Price Expectations , housing market overvaluation , monetary policy shock , housing overvaluation , house price expectation , monetary policy transmission , interaction term , Housing prices , Central bank policy rate , Housing , Asset bubbles , Asset prices
Summary
This paper examines how housing market overvaluation—measured by the price-to-rent ratio and its deviations from long-term trends—affects the transmission of monetary policy. Using U.S. metropolitan-level data and three measures of monetary policy shocks, we find that house prices respond more strongly to policy rate changes in overvalued markets. Examining buyer heterogeneity, we show that investor demand, proxied by non-owner-occupied purchases, declines more sharply after monetary tightening in these markets. These results are consistent with models of extrapolative beliefs and suggest that monetary policy can serve a stabilizing role during housing booms.
