Monetary Determinants of House Prices in the European Countries

Objective: The aim of this article is to investigate monetary policy effects on the house prices for the panel of 12 Central and Eastern European (CEE-12) countries, 12 small European countries (EU-12) and 5 largest European countries plus the UK (EU-6). Research Design & Methods: A five-variable Panel Vector Autoregressive (PVAR) model is estimated for quarterly data from 2010Q1 to 2023Q2. Findings: An increase in the short-term interest rate has a depressing effect on the house prices in the European countries, along with higher inflation and exchange rate depreciation (to less extent). An increase of output over the business cycle brings about a temporary decrease in house prices in both CEE-12 and the EU-12 countries. As intuitively expected, a housing boom is expansionary and inflationary in all European countries, though with a different time profile. There is strong evidence of the interest rate response to house prices in the CEE-12 countries and the EU-12 countries (at longer horizons). Implications / Recommendations: This paper supports the proposals for using monetary tightening in response to the boom in the housing market. It is especially the case for the CEE countries where a two-way causality between the short-term interest rates and house prices seems to be particularly strong. Contribution: This paper contributes to studies of stabilisation properties of monetary policies in the European countries, in the presence of real and nominal effects of housing markets.