The Impact of Monetary Policy on Homeownership

Abstract

From a theoretical perspective, monetary policy has an ambiguous impact on homeownership. For instance, contractionary monetary policy leads to higher interest rates and lower incomes making housing more unaffordable, but counteracting this is lower house prices. I build a heterogeneous agent overlapping generations model of the Australian housing market parameterising these three key transmission channels to study the sign and magnitude of the response of homeownership to monetary policy. I find there is a small positive effect of homeownership to a one standard deviation unanticipated contractionary monetary policy shock, with the shift in house prices explaining much of the movement in the homeownership rate.