Monetary policy and the global housing bubble

What caused the housing boom of the 2000s? A number of researchers have suggested that loose monetary policy during the first half of the 2000s was a primary cause of the substantial run-up in house prices in many countries. However, using a common statistical approach, we find that monetary policy was not the main factor. That should not be surprising: Although low interest rates raise house prices, the increase in prices during the mid-2000s was much larger than the historical relationship between the two variables would suggest. Instead, we investigate further the link between the marked loosening in terms and standards for mortgage credit and the most rapid increases in house prices. This link provides some evidence for a story where credit provision and the demand for housing fed on each other and helped spur the housing boom. Our work suggests a greater role for macroprudential regulation rather than monetary policy in managing asset price booms.— Jane Dokko, Brian M. Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim and Skander Van Den Heuvel