RBA Paper: Lower Interest Rates Increase Housing Wealth Inequality

By Sophia Rodrigues

Lower interest rates increase housing wealth inequality at least in the short term, according a discussion paper published by the Reserve Bank of Australia Monday.

The paper examines the distributional effects of monetary policy based on evidence from local housing markets and is authored by Calvin He and Gianni La Cava.

According to the paper, the effect of monetary policy on housing prices varies substantially by local housing market and is due to factors like housing supply conditions, mortgage debt, investor concentration and average income.

“Specifically, monetary policy could have larger effects on housing prices when supply constraints are binding, mortgage debt is higher, there are more investors and incomes are higher, all other things being equal, the paper said.

The paper said the varying housing market experiences both between and within states and territories is important to study the effects of monetary policy.

This is because, among other things, the distribution can tell why monetary policy works. For example, because expensive areas may be more supply constrained than cheaper areas, and hence more response to interest rates, the economy as a whole may be more sensitive to monetary policy if more areas are supply constrained.

And because more expensive regions are more sensitive to changes in monetary policy, the paper concludes that reductions in the cash rate increase housing wealth inequality.

However, this effect appears temporary and the prices differences between regions disappear about two years after the interest rate change, the paper says.

--Contact: Sophia@centralbankintel.com