The effect of unconventional monetary policy on the housing market

The European Central Bank (ECB) has been often blamed by commentators for the recent increase in house prices in the euro area. Evidence seems to show however that this is not the case.


Central bank policy
Central banks around the world were faced with considerable difficulties in tackling the global financial crisis, as conventional monetary policy tools proved to be of limited use, having reached the zero-lower bound. The main goal of this policy was to achieve the ECB’s mandate, which is to reach an inflation rate of close but below 2%. 
House prices
At the same time, house prices across the Eurozone increased substantially over the last decade following the global financial crisis. Some commentators attribute the rise in house prices, and asset prices more broadly, to the ECB’s unconventional monetary policy measures. As can be seen in Figure I, real housing price growth has not been the same across the countries examined. Countries such as Austria, Belgium, and Germany exhibit real housing price growth not being affected by the Global Financial Crisis in 2007. Other countries such as Spain, Ireland, the Netherlands, and Portugal, have shown a strong recovery after a period of falling house prices, reaching in some cases already the pre-crisis peak. Real house prices in Finland and France have neither increased nor decreased after having reached the peak in 2007. Finally, Italy is still exhibiting a fall in real house prices, 10 years after the peak. 
Figure I. Real house prices
Notes: the base year of the real house price index is 1999. The vertical line denotes 2007 the Global Financial Crisis.

Source: TCP Brokerage, OECD (2019)
Household indebtedness
Mortgage credit has been often the cause of increasing house prices, as in the run-up to the Global Financial Crisis. For the euro area countries in the sample, as can be seen in Figure II, household debt as a % of net disposable income has either stagnated or decreased in most countries, with the exception of Belgium, Finland, and France where household debt increased. Against this background and considering that countries that exhibited the strongest growth in real house prices are those where households deleveraged the most, i.e. Spain, Ireland, and the Netherlands, it seems unlikely that this time the increase in real house prices stems from the credit channel. This would suggest that the macroprudential policies of the ECB have been effective so far.  
Figure II. Household indebtedness
Notes: the figure displays the development household debt as % of net disposable income.


Source: TCP Brokerage, OECD (2019)
Statistical evidence
By employing a panel regression on a sample of 10 euro area countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain), unconventional monetary policy, measured through the shadow interest rate and the ECB’s total assets, is found to have no significant effect on house prices and on residential investment alike. Factors such as unemployment rate, personal consumption expenditure, and inflation rate seem to play a bigger role in affecting house prices. Potentially the recent increase in house prices across the Euro-10 area might have been driven by sound economic fundamentals such as increasing income, falling unemployment and low inflation. This would be a welcome news for policymakers and private citizens alike. For policymakers it might mean that from a macroprudential perspective a good job has been done so far in preventing potential risks stemming from the housing market that might affect the economy.  
Limitations and future research
Given that unconventional monetary policy has been introduced only in recent years (2010), and the ECB’s asset purchase program started only in 2015, it might be of interest to reconduct this research once more data becomes available further down the road. Furthermore, this study analyzes the effect on housing market variables only, as data availability for commercial real estate is limited. It might be therefore interesting to explore potential links between unconventional monetary policy measures and commercial real estate prices as the actors in the two markets might differ, with potential different results as a consequence.