Housing prices as a leading indicator of inflation
In this paper, Liu et al. present some stylized facts pointing to house prices as a leading indicator of headline inflation in the U.S., U.K., Sweden, Canada, Brazil, Mexico, Luxembourg, Korea and Iceland. They then apply machine-learning models to forecast the two housing components in the headline inflation and find that:
- Inflation of these housing components would peak after the expected peak of headline inflation;
- In addition, their results suggest that for most of these countries, the housing components could have a relatively large and sustained contribution to headline inflation, as inflation is just starting to reflect the higher house prices.
For monetary policy these findings imply:
Rising housing prices can increase households’ expectations of headline inflation measures, and the spillovers to non-housing inflation could also intensify the upward pressure on inflation. On the other hand, monetary tightening itself can slow down the growth of house price or rent, which mitigates the impact on inflation and highlights the need for modeling the feedback loop among house price growth, inflation, and monetary policy (e.g., by introducing an endogenous monetary policy response function).
Housing Boom and Headline Inflation: Insights from Machine Learning
Authors: Yang Liu, Di Yang, Yunhui Zhao
From: International Monetary Fund
How do house prices respond to monetary policy surprises
Economic literature so far has provided evidence that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. In this paper, Gorea et al. present evidence that actually the response is much faster. They use high-frequency data on house listings and distinguish between the price at which a house comes on the market, the list price, and the price at which the house is sold, the sale price. It is this distinction that leads them to a different conclusion from existing literature as they demonstrate that list prices play a central role in housing market adjustment to monetary policy announcements.
In particular, the authors find that house list prices move quickly after monetary policy announcements, responding mainly to surprises about future interest rates. A one-standard-deviation contractionary surprise to future interest rates–—implied by forward guidance (FG) and large-scale asset purchases (LSAP)–—lowers list prices by roughly 0.2 and 0.3 percent, respectively, within 2–3 weeks after the shock. These responses are similar in magnitude to responses of financial assets on the day of an FOMC announcement, derived using the same surprise measures.
House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data
Authors: Denis Gorea, Oleksiy Kryvtsov, Marianna Kudlyak
From: European Investment Bank, Bank of Canada, Federal Reserve Bank of San Francisco
