Housing Channels of Monetary Policy Transmission in European Industrial and Transition Countries

Stanimira Milcheva and Steffen Sebastian

University of Regensburg

Motivation

What is the role of the housing market in the monetary policy transmission to consumption and residential investment?

Hypothesis: Housing markets play an important role for the transmission of monetary shocks to consumption and investment in countries with flexible and well developed mortgage markets.

Milcheva • Housing Channels of Monetary Policy Transmission

Housing Channels of Monetary Policy Transmission

Monetary policy shock

Interest rate channel Credit channel

House Prices

Cost of capital effect Tobin‘s Q effect

Residential investment

Interest rate income effect Housing wealth effect Rents and savings effect

Consumption

Collateral effect

Milcheva • Housing Channels of Monetary Policy Transmission

Institutional factors

Country Year

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden UK US Bulgaria Czech Republic Estonia Hungary Lithuania Poland Slovenia

Mortgage market index of completeness 2008

31% 34% 82% 49% 23% 28% 35% 39% 26% 71% 59% 40% 66% 58% 98% -

Mortgage debt outst.

(from MFIs) to GDP 2008

25.3% 39.8% 95.3% 47.5% 35.9% 46.1% 32.0% 80.0% 19.8% 99.1% 53.3% 63.3% 62.0% 60.6% 80.5% 77,0% 11.6% 10.8% 39.2% 14.0% 17.3% 15.6% 9.1%

Average typical LTV ratio 2008

84% 80% 80% 70% 91% 72% 58% 83% 65% 100% 70% 56% 61% 80% 77% 75% 80%-90% 56% 100% 61% 75% 90% 61% 80,0% 80,0% 70,0% 91,0% 72,0% 58,0% 83,0% 65,0% 100,0% 70,0% 56,0% 61,0% 80,0% 77,0% 75,0% 0% 56% 0% 48% 0% 1% 0%

Total outst.

securitization from resid.

lending Prevailing type of mortgage rate 2007

variable fixed (>10y) fixed variable fixed (>10y) fixed (>5y) variable variable variable fixed (>5y) variable variable variable fixed (>1y) variable initial fixed variable initial fixed fixed until 2005 variable variable variable

Mortgage equity withdraw (MEW) 2003-2007

no no yes yes no no no limited no yes yes limited yes yes yes -

Refinancing (fee-free prepayment)

no no yes yes no no no yes no no no no no yes limited yes -

Milcheva • Housing Channels of Monetary Policy Transmission

Methodology

• Estimation of vector autoregression (VAR) models for 21 European countries and the US.

• Counterfactual simulation of impulse responses. (see Bernanke et al. (1997))

Milcheva • Housing Channels of Monetary Policy Transmission

Existing Literature

Ludvigson et al. (2002): SVAR with total wealth, counterfactual simulation, US, 1966:1 – 2000:3, insignificant effect of the wealth channel on consumption in the US.

Giuliodori (2005): VAR with house prices, counterfactual simulation, 9 European industrial countries, 1979:3 – 1998:4, house prices play an important role for the transmission of monetary policy shocks to GDP in countries with well developed housing markets, such as Sweden, Spain, the Netherlands.

Elbourne (2008): SVAR with house prices, counterfactual simulation, UK, 1987:M1 – 2003:M5, house prices play a small role in the monetary policy transmission mechanism.

Milcheva • Housing Channels of Monetary Policy Transmission

Contribution

• A more in-depth study of the monetary policy transmission through housing • Broader sample of countries, including Central and Eastern European (CEE) countries • Same model applied to all countries • Accounting for structural breaks • Time period after the liberalisation of the mortgage markets • Specifying the role of each housing channel on consumption and investment • Accounting for significance of simulated impulse responses

Milcheva • Housing Channels of Monetary Policy Transmission

Data

• •

Countries

Industrial countries: AU, BE, DK, DE, GR, FI, FR, IR, IT, NL, NO, ES, SE, UK, US CEE countries: BG, CZ, EE, HU, LT, PL, SI

Estimation period

From mid-1990s to 2008 (quarterly)

Variables

consumer price index household consumption gross fixed capital formation in housing house price index money market rate

Milcheva • Housing Channels of Monetary Policy Transmission

Results: Shock in IR HP

Milcheva • Housing Channels of Monetary Policy Transmission

Results: Shock in IR HP

Milcheva • Housing Channels of Monetary Policy Transmission

Countries with significant housing wealth/collateral effects

Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response.

Milcheva • Housing Channels of Monetary Policy Transmission

Countries with significant housing wealth/collateral effects

Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response, blue line: simulated respinse when GFCF=0 in consumotion equation.

Milcheva • Housing Channels of Monetary Policy Transmission

Results: Shock in HP GFCF

Milcheva • Housing Channels of Monetary Policy Transmission

Countries with significant Tobin‘s Q effects

Dark blue line: estimated impulse response, red line: simulated impulse response of consumotion to an interest rate shock.

Milcheva • Housing Channels of Monetary Policy Transmission

Thank you!

Milcheva • Housing Channels of Monetary Policy Transmission

Milcheva • Housing Channels of Monetary Policy Transmission

Milcheva • Housing Channels of Monetary Policy Transmission