Research project: Could Interest Rate Hikes Burst The Housing Bubble?

This paper discusses the US housing market from a monetary policy point of view. In recent years we saw a vast increase in real housing prices, which could be a consequence of the low interest rate environment. Recent economic developments causing heightened inflationary pressure however lead most central banks to start an aggressive interest rate rise policy, ending the low interest rate era. This leads us to the proposed question - could the interest rate hikes burst the housing bubble? To investigate this, I estimate a two-regime TVAR model dependent on housing prices using US data. Results show that although the size of the impact of an interest rate shock is similar in both regimes, its persistence much stronger when housing prices are high.