Monetary policy and the housing market in Australia

Abstract

This paper models the role of monetary policy in the Australian housing market using structural vector autoregression model. Our results show that a contractionary monetary policy significantly reduces housing activity but does not exert any significant negative effect on the real house prices. The housing output and real house prices also respond significantly to shocks stemming from housing supply, housing demand and a number of other variables. The findings further suggest that monetary policy rule in Australia takes into account the changes in house price along with the usual targets of inflation and output gap. On the backdrop of the observed high house prices and increased affordability problem, the findings of this paper are expected to shed some lights on the current policy environment pertaining to the Australian housing sector.