Honing in on housing

Using a six variable SVAR model, we study the transmission mechanism of monetary policy to the housing market over the period between 1996:Q1 and 2019:Q4. The SVAR is repeated for two measures of fiscal policy namely, tax revenue and government spending as well as for three measures of the housing market namely, residential prices, the price-to-rent ratio and the price-to-income ratio. Our main results show that monetary policy shocks do not have an impact on residential prices however, when running our model using fiscal policy shocks instead of monetary policy shocks, the results become statistically significant. Further, our results show that the response of housing prices to fiscal policy shocks differs between Portugal and Spain. We conclude that the difference in the housing markets in these two countries can be attributed to the variation in the fiscal policy mandates adopted while the common monetary policy framework implemented by the ECB does not play a role.