IMF Working Papers

Monetary Policy and Housing Overvaluation

By Nina Biljanovska, Eduardo Espuny Diaz, Amir Kermani, Rui Mano

October 3, 2025

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Format: Chicago

Nina Biljanovska, Eduardo Espuny Diaz, Amir Kermani, and Rui Mano. "Monetary Policy and Housing Overvaluation", IMF Working Papers 2025, 207 (2025), accessed October 4, 2025, https://doi.org/10.5089/9798229027779.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines how housing market overvaluation—measured by the price-to-rent ratio and its deviations from long-term trends—affects the transmission of monetary policy. Using U.S. metropolitan-level data and three measures of monetary policy shocks, we find that house prices respond more strongly to policy rate changes in overvalued markets. Examining buyer heterogeneity, we show that investor demand, proxied by non-owner-occupied purchases, declines more sharply after monetary tightening in these markets. These results are consistent with models of extrapolative beliefs and suggest that monetary policy can serve a stabilizing role during housing booms.

Subject: Asset bubbles, Central bank policy rate, Financial crises, Financial institutions, Financial services, Housing, Housing prices, Loans, Monetary policy, Mortgages, National accounts, Population and demographics, Prices, Reserve requirements

Keywords: Asset bubbles, Central bank policy rate, House Price Expectations, Housing, Housing prices, Loans, Monetary Policy, Mortgages, Overvalued Housing Markets, Reserve requirements

Publication Details

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