The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets in Australia

The effect of monetary policy on housing prices varies significantly across local housing markets. This heterogeneity across local housing markets can be partly explained by variation in housing supply conditions-housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. The fact that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas indicates that lower (higher) interest rates increase (decrease) housing wealth inequality. However, the effects of monetary policy on housing wealth inequality appear to be temporary. Other factors also explain the variation in sensitivity to monetary policy across local housing markets with the sensitivity being greater in areas in which incomes are relatively high, households are more indebted and there are more housing investors. This suggests that the sensitivity of housing prices to monetary policy is state dependent.