Monetary Policy and the Homeownership Rate in Australia

How does monetary policy affect homeownership?

A monetary contraction may have contrasting effects due to rising interest rates, falling incomes, and lower house prices.

To investigate, we build a rich model of Australia households that captures differences in their ages, incomes, savings, housing, and mortgage debt. This helps us to understand their housing tenure decisions as well as mortgage finance choices. Finally, the model includes a high-level (“exogenous”) representation of the impacts of monetary policy in Australia. Specifically, it captures realistic dynamic relationships between interest rates, national incomes, and average house prices.

We then use the model to study the impacts of monetary policy shocks on housing decisions across the population. We show that a monetary policy contraction reduces homeownership, with the initial impact driven by rising mortgage rates and persistent effects due to lower household incomes. Ownership dynamics are also shaped by mortgage borrowing constraints, stamp duty, macroeconomic conditions, and household expectations about the evolution of monetary policy. Finally, we investigate the extent to which fluctuations in monetary policy result in welfare losses for different households, particularly those who would have been home buyers in the absence of a monetary policy shock.

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