Monetary policy shocks, changing credit conditions and the house price to rent ratio : the case of the Irish property market

In this paper we assess the implications of monetary policy shocks on the house price to rent ratio in the case of the Irish property market. Crucially, in light of the particular circumstances of the market, we allow for the interaction between monetary policy and changing credit conditions in terms of how the house price to rent ratio is impacted in such a context. In particular, we allow for interest rates to impact the ratio directly through the user cost of capital but also indirectly through a credit conditions indicator. In a number of applications, changing credit conditions have been demonstrated to act as a wedge between the house price to rent and the user cost ratio. Additionally, we also use a modelling system, which allows for interest rates to impact house prices separately. Results from this system show that a contractionary monetary policy shock has a greater impact on house prices than rental prices. This has important implications from a policy perspective in terms of the overall impact of monetary and macroprudential policy on the housing market.