This paper investigates the effect of monetary policy on UK house prices, with focus on the role that interest rates have on the housing market. The analysis and discussion are topical as the cost of living and housing affordability are both key modern concerns in the UK. This study examines dynamic interactions between house prices, interest rates and aggregate demand through the use of a Vector Autoregressive (VAR) model and the Augmented Dickey-Fuller (ADF) stationarity test, using quarterly data from 1997-2023. A unique feature of this analysis is the construction of the demand variable, which incorporates housing related components to provide a targeted macroeconomic lens. The Impulse Response Functions (IRF) generated reveal that interest rate increases lead to an immediate and significant decline in house prices, and that over several periods this returns to zero, consistent with asset pricing theory. This study further acknowledges behavioural and institutional complexities which shape the policy transmission mechanisms and offers timely insights for policy makers navigating a housing market with affordability and uncertainty concerns.
Ellis et al. (Thu,) studied this question.
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