A property market boom or crash propelled by debt remains the primary origin of risk to economic stability. A monetary policy is usually put in place to control the quantity of money in circulation to sustain economic growth. Among the federal government’s changes is lowering or raising interest rates to make finance accessible or inaccessible to many.
Such changes typically have a direct effect on the real estate market. Although monetary policy’s impact might not be immediate, house prices’ dynamics shift with time. Fundamentally, interest rates contribute to the changes in house prices. That means that a shift in either direction in the interest rates can move the prices also. Housing demand and affordability are heavily influenced by monetary policy and the volatility of interest rates. The two main ways a government through the central bank is by either a tight or loose monetary policy.
Here is a quick look at the effect of monetary policy on house prices
Tight Monetary policy & its Effect on Housing Prices
When there is an increase of circulation money, the likely result is a high cost of living. The federal government can increase the interests to bring down inflation, and the cost of living, which places breaks on the economy’s growth. Although it does an injustice to the economic growth by rising unemployment rates, it is an excellent measure to control and stabilize the economy.
The relationship between this monetary policy and house prices is that the prices will drop. A rise in interest rates means that lending is inaccessible to the majority resulting in fewer people’s access to mortgages. When there is a high supply of houses and low demand due to unaffordability, the prices go down.
Loose Monetary policy & its Effect on Housing Prices
Now, this is the opposite of the above-explained monetary policy. When a country is slow on economic growth, recession, or high unemployment rates, a loose monetary policy can cushion the economy and the people. The aim is usually to create a robust economy. The federal government does this by lowering interest rates and increasing the amount of money in circulation. When there is a lot of money floating, people want to spend more, vastly increasing their chances for investments.
The notable investment for most is usually housing. When there is a high demand for houses, and the supply is low, house prices go up. Therefore loose monetary policy and house prices are related in that manner.
Monetary Policy and House Prices
Monetary policies have been used globally to stabilize the economies. Regardless of the monetary policy, the federal government opts for; the sure thing is that it will affect the house prices either by going up or dropping. By keeping the interest rates1 low during the Covid-19 pandemic, the U.S. has seen a significant rise in house prices, something that may continue through 2021.
In the U.K., house prices have also gone up for the first time in six years by 7.5% due to policy measures2 to curb the economic effects of Covid-19.
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List of external links
- Fed Policy Has Kept Mortgage Rates Low. It’s Also Driving Up Home Prices https://www.forbes.com/sites/advisor/2020/07/28/fed-policy-has-kept-mortgage-rates-low-its-also-driving-up-home-prices/?sh=2ce06d1649c4
- UK house prices see highest growth in six years in 2020 https://www.bbc.com/news/business-55483432