Study on NHB’s Residex

Abstract

Housing and real estate markets are of central concern to monetary policy makers. To achieve the dual goals of price stability and a sustainable level of growth and employment, monetary policy makers must persevere to factor in the monetary transmission mechanism and the dynamics of the housing market behavior. Central bankers naturally pay close attention to interest rates and asset prices. Property prices, in general, are forward looking and they reflect market’s expectations of the value of the future stream of services derived from the property. These prices contain important information about the current and future state of the economy and could play an important role in monetary policy setting for its overall objectives of price stability and sustainable growth. Residential and commercial property accounts for a sizable share in the wealth of a nation. It is evidenced almost routinely that house price fluctuations may amplify the macroeconomic shocks, like supply, demand, or monetary policy shocks. Housing sector may be buoyed up by non-fundamental price movements, giving rise to imbalances in the financial system and the economy. House prices enter the monetary policy transmission mechanism primarily through the wealth channel and via the balance sheet of the banking sector. Although these two channels are not the only, or probably even the dominant, channels of monetary policy transmission (exchange rate, interest rate and credit channels also operate), it is the interconnections between all these channels from which the power of monetary policy stems.