The interest rate sensitivity of house prices: International evidence on its state dependence

52 Pages Posted: 23 Feb 2024

See all articles by Matthias Burgert

Matthias Burgert

Swiss National Bank

Johannes Eugster

Swiss National Bank

Victoria Otten

University Bonn

Date Written: February 23, 2024

Abstract

This paper investigates how house prices have historically responded to interest rates and how their reaction has depended on preexisting conditions. We identify exogenous variations in short-term interest rates for 29 OECD countries relying on international spillovers from US monetary policy. Our results suggest that the average house price reaction is larger and more protracted than most of the previous estimates suggest. Amplitude and speed, however, depend considerably on the specific context. The reaction of house prices is larger and faster when interest rates are low, when their increase occurs during a recession, and when credit conditions are already tight. A preceding boom in house prices slows the price reaction at first but amplifies the decline in the medium term. Based on these results, we estimate how the cyclical conditions prevalent in 2022 typically influenced the house price reaction in our historical sample.

Keywords: house prices, interest rates, local projection, smooth transition function

JEL Classification: R21, E51, E32

Suggested Citation

Burgert, Matthias and Eugster, Johannes and Otten, Victoria, The interest rate sensitivity of house prices: International evidence on its state dependence (February 23, 2024). Swiss National Bank Working Paper No. 01/2024, Available at SSRN: https://ssrn.com/abstract=4732270 or http://dx.doi.org/10.2139/ssrn.4732270

Matthias Burgert (Contact Author)

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Johannes Eugster

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Victoria Otten

University Bonn ( email )

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