DOI: 10.52340/ekonomisti.2025.04.01

Expanded summary 

The impact of monetary policy on the real estate sector is a complex relationship of various transmission mechanisms and market dynamics. Monetary policy plays a crucial role in shaping real estate markets, since their contribution to the economy is significant. The real estate sector accounts for roughly 16% of US GDP through residential investments and housing services, making it a critical focus for macroeconomic and financial system stability. Traditionally, the primary transmission channel through which monetary policy affects real estate is the interest rate channel. Changes in the federal funds rate impact mortgage rates, which in turn influence housing affordability and investment attractiveness. Lower interest rates generally reduce borrowing costs, stimulate housing demand, and lead to higher property prices. The credit channel, where monetary expansion increases bank liquidity and credit availability, is complementing these effects, enabling more homebuyers and investors to access real estate assets, strengthening the effect of lower rates.

Additionally, wealth effects take place when rising real estate values increase household wealth, encouraging higher consumption and further powering demand. Asset pricing theory explains how interest rate changes affect property values by changing discount rates applied to income streams from future rental. This relationship usually is represented as nonlinear in low interest rate environments. Investors also engage in portfolio rebalancing, shifting from bonds to real estate assets during periods of low interest rates, which increases demand and prices.

The deployment of unconventional monetary policies such as quantitative easing and forward guidance has intensified these dynamics. Quantitative easing, involving large-scale asset purchases, has directly impacted housing finance conditions by reducing mortgage spreads and expanding credit availability. Such policies stimulate portfolio rebalancing as investors seek yield in real estate when bond returns are limited. Forward guidance influences expectations around long-term interest rates, which more directly affect mortgage rates and investment decisions. Empirical research finds that housing markets react to monetary policy surprises remarkably fast, within weeks, challenging prior beliefs that such effects took years to impact the market.

Monetary policy effects also exhibit notable heterogeneity across regions and property types. Financially developed and credit-rich areas experience stronger pass-through effects, while markets with elastic housing supply show softer price responses due to capacity for additional construction.

International comparisons also indicate that the effectiveness of monetary policy varies with housing market conditions. In strong markets, expansionary policies have diminished effects, while weaker markets are more sensitive. Inflation targeting strategies also reveal trade-offs between price stability and asset price inflation, with some economies like China facing higher risks of asset bubbles due to limited investment alternatives.

However, it is important to note that unintended consequences of monetary policy, particularly quantitative, raise financial stability concerns. Research from Germany notes that asset purchases can misallocate credit toward real estate asset managers rather than suppliers, inflating prices without easing supply constraints. This creates bubbles characterized by higher price-to-rent ratios, increased bank loan defaults, and reduced banking sector profitability.

Policymakers face problems in managing housing market outcomes through conventional monetary tools. Federal Reserve representatives understand that lowering policy rates may increase housing demand and costs, creating opposing buyer and seller incentives.

In conclusion, monetary policy significantly affects real estate markets in US and worldwide through multiple intertwined mechanisms. The faster transmission speed, stronger impacts due to unconventional policies, and heterogeneous market responses complicate policy design. The financial stability risks resulting from long accommodative policies underline the importance of real estate market monitoring. Future policy frameworks may require integrated approaches combining monetary, macroprudential, and fiscal tools to balance economic growth, market stability, and housing affordability. It is important to better understand non-linear and sector-specific transmission effects and control housing market volatility while sustaining broader economic health.