Germany: Monetary Policies & Regional Housing Markets

Photo by Viviane Pasta on Unsplash

Monetary policy shocks create a ripple effect across housing markets, but not all waves are equal. A new study (The unequal impacts of monetary policies on regional housing markets by Kevin Patrick Boge, Malte Rieth, and Konstantin Kholodilin) reveals stark differences in how various housing segments and regions in Germany respond, especially with the potential implications for spatial polarization and political sentiment. What's also interesting is the impacts of the unconventional monetary policy conducted by the European Central Bank (ECB) from 2010 onwards, but that may only limit the impact of the paper to the European context.

Why it matters

The paper challenges the one-size-fits-all approach to monetary policy. It highlights the need for more targeted interventions in housing markets.

• Regional housing disparities do have more of an outsized impact than people expect, especially given the differences in what kind of housing can be built in bigger cities compared to smaller cities. 

• The uneven impact could contribute to political discontent, especially in rural areas.

• While focused on Germany, the study raises questions about similar effects in other European countries under ECB policy.

By the numbers:

• 7% decline in primary market rents after 3 years following a shock

• 11% drop in multifamily plot prices after 7 years

• 16% gap in terraced house price response between small and large cities

• 40% fall in price-rent ratio after 5 years under unconventional policy

• 30% decrease in price boom probability after 6 years under unconventional policy

• 3x reaction of middle-class house prices in small cities compared to largest cities

Some Thoughts Behind the Disparity

1. Market Mosaic: Housing isn't monolithic; it's a patchwork of segments and regions

2. Rural Vulnerability: Higher homeownership rates in the countryside mean greater exposure to price swings

3. Liquidity Matters: Urban markets are more fluid, cushioning some of the policy impacts

4. Unconventional Wisdom: New policy tools hit long-term rates harder, amplifying market effects

5. Populism Potential: These uneven effects could be stoking the fires of discontent

6. Cash-Flow Model: Responses align with standard asset pricing theory

7. Liquidity Mechanism: Explains the rural-urban response gap

8. Unconventional Narrowing: New policies reduce rural-urban gaps but increase urban price volatility

9. Unintended Consequences: Asset price inflation from unconventional policies may erode support for monetary policy across all regions

The Evidence Speaks

• Data Goldmine: 50 years of transaction prices across 200+ German regions and all residential market segments

• Segment Sensitivity: Land prices most affected, followed by property prices, then rents

• Rural-Urban Divide: A 1% rate hike hits small-town house prices 3x harder than big-city equivalents

• Unconventional Consequences: These newer policies supercharge effects across the board, particularly in urban areas

• Boom-Bust Impact: Monetary policy significantly affects housing cycle indicators

• Migration Matters: Population shifts from smaller to larger cities post-shock, potentially exacerbating disparities

• Economic Equalizer? Surprisingly, general economic indicators (GDP, unemployment, insolvency, household income) respond similarly across regions.

• Supply Side: Housing supply (completed dwellings and housing stock) is more sensitive to shocks in rural areas (Maybe because of zoning in larger cities or just a pure response to decreasing demand)

• New Measure: Study introduces high-frequency monetary surprises for the Bundesbank era

The bottom line:

Monetary policy inadvertently plays favorites in the housing market, potentially fueling spatial polarization and populist sentiments. The effects are more pronounced with unconventional policies, challenging policymakers to balance macroeconomic objectives with housing market stability.

• Land prices feel the burn most intensely and for longer.

• Property prices follow suit but with less intensity.

• Rents bring up the rear, showing the least dramatic responses.

• Rural areas bear the brunt compared to urban centers.

• Unconventional monetary policy packs an even bigger punch, especially in cities.

• These disparities contribute to spatial housing polarization.

• The uneven impact may be fueling populist sentiments in affected areas.
  

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