We examine the interest rate elasticity of housing prices, advancing the empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices.

Despite a recent proliferation of empirical studies on determinants of residential housing prices, there is still no consensus on key characteristics of the aggregate residential housing price equation. In particular, existing studies provide conflicting evidence on the elasticity of residential housing prices with respect to the short-term interest rate. Given that the latter is one of the few policy instruments that influence housing prices, knowledge of the magnitude of its impact on the housing market is important for policymakers. This question has recently garnered increased attention given the cooling-off of a number of major real estate markets. In this study, we attempt to provide an answer using two different cross-country datasets and an arsenal of econometric techniques. In what follows, Section II reviews the theoretical and empirical literature on determinants of residential housing prices, and identifies the main findings and gaps in the literature, as well as our contributions to it, Section III presents the regression analysis, and Section IV draws conclusions.