Housing Markets, Local Constraints, and Monetary Policy in England

The UK housing market features some of the most expensive, yet smallest dwellings in Europe. Nonetheless, historically low policy rates fuel housing demand. But because incomes, regulatory and physical constraints differ across regions, so does the transmission of an aggregate policy shock. This paper investigates the response of English house prices and property sizes to a monetary policy shock, and analyzes the role of local constraints in the transmission mechanism. Using data for all residential property sales between 1995 and 2015, I present 3 main results. First, prices and transactions rise following an unanticipated cut in the policy rate, with more pronounced results for re-sales compared to first-time sales. Second, I show that the income channel plays no role in determining local differences in housing market dynamics. Finally, local planning regulations create a trade-off between higher prices and preserving property size. Thus, local policy can affect the distributional impact of monetary policy on the housing market