The asymmetric impacts of monetary policy on housing prices: A viewpoint of housing price rigidity

a r t i c l e i n f o Keywords: Loss aversion Downward housing price rigidity Monetary policy Threshold error correction model Asymmetric adjustment Previous studies have discovered the defensive characteristics of housing prices, which is also known as downward price rigidity. This paper discusses whether this feature would result in an asymmetric relationship between housing prices and monetary policy. This paper first uses the loss aversion behavior of traders to assess the viability of housing price rigidity in the housing market and to deduce further that if downward housing price rigidity actually existed, then the impact of monetary policy on housing prices should be asym-metric. For empirical tests, this paper uses data from the UK housing market and then uses the money supply as the proxy variable of monetary policy. The relationships between these two variables are observed. This paper performs estimation using both traditional and threshold error correction models by comparing the coefficients of both models. The results indicate that housing price is indeed asymmetrically adjusted to money supply. When housing prices increase to reflect a loose monetary policy, a modification behavior is evident. Conversely, housing prices cannot easily reflect a tight monetary policy. This result indicates that housing prices tend to overreact in upturn and underreact in downturn. The results imply that when implementing relevant policies for the housing market, the government should consider the asymmetry of housing price changes. Otherwise, the situation can easily result in the creation of a bubble or the collapse of the housing market because of incorrect policies. After the housing market bubble burst in the U.S., a significant amount of research focused on factors that destabilized the housing market, such as government control over the housing market and the irrational behavior of investors. Studies have suggested that the housing market is not as efficient as assumed in theory (Case and Shiller, 1989; Shiller, 1993, 2005) because not all buyers behave rationally according to the hypothesis in the theoretical model, and their irrational behavior causes housing price inefficiency. Researchers have suggested that the inefficiency is caused by inappropriate government intervention. For instance, in the case of subprime mortgage, excessive subsidy policy (Shiller, 2009) and easing monetary policy are the causes of housing market imbalance in the U.S. This paper proposes that inappropriate government intervention and irrational behavior of investors might both be the cause of the housing market crisis. In …