Do central banks react to house prices?

Some do and some don't, according to a new working paper by Swedish Riksbank economists Daria Finocchiaro and Virginia Queijo von Heideken:

The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions, while they did not in the U.S.

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I get the impression that the Bank of England rate decisions are hugely influences by property prices. Especially considering 70% of Britain's own their home.

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Some people (like Michele Boldrin) suggest that the loose liquidity policy pursued by the Fed between 2001 and 2004 has fuelled the pyramidal creation of liquidity that has, apparently, contributed to the recent turmoilin the housing market. The fact that the Riksbank people tell us a story where the Fed has kept into account house prices in monetary policy seems a little odd to me. Did the Fed really focus on house pricing, disregarding what happened to the other segments of the financial markets? Or, rather, do house prices pick up a certain correlation with the stock index and... that's what the Fed looked at? Perhaps the Financial Times, more than certain ways of doing academic modelling, could reveal interesting patterns. Look at the inspiring commentary by Steve Cecchetti titled "Bernanke's Fed shows that it can be nimble", published on January 23 3008. Real food for thought.

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Free markets find ways to clear (complete article in link below):

"Teseniar, who works for the American Heart Association, went shopping with a real-estate agent. She found her dream house for $64,000, bid $50,000 on the foreclosed property and moved in this past November.

The previous owner walked away from the house when he got a new job in California, couldn't sell it and wouldn't pay the mortgage, she says. Left behind was a perfectly fine house with redone floors, wrought-iron fixtures and granite countertops.

"It was gorgeous. I couldn't breathe when I got it. It was so cool," says Teseniar, who is divorced and has a 4-year-old daughter. The price was right, too. She now pays $586 a month for her mortgage, taxes and insurance, $200 less than what she had been paying for rent. And she qualified for a 30-year Federal Housing Administration mortgage to buy it.

Then there are buyers like Lymaris Roman, a Tampa, Fla., pharmacist, and her husband. They saw opportunity, too, in a one-story home with four bedrooms in suburban Lutz, Fla. They bought it for $270,000, far less than its $400,000 appraised value. They moved in on Christmas Day.

Alex Szalay, a software writer from Pittsburgh, has redone two houses in the past 18 months. He says it's profitable to buy foreclosed homes that are in reasonably good shape. He bought one house for $72,000 and sold it for $117,000 a few months later in Sharon, Pa., about 30 miles north of Pittsburgh.

He recently bought a four-bedroom, three-bathroom home in Lakeland, Fla., for $240,000, made $30,000 in repairs and sold it for $365,000 within three months.

"When people tell you, 'Don't buy real estate,' well, you should buy real estate," Loughlin says. "People aren't going to stop retiring. Kids aren't going to stop graduating from colleges. This lag will catch itself, and there will be more demand than supply."

Sandy Muff, 31, an office manager in Tampa, Fla., decided to buy a bungalow last year for $70,000.

She's renting it out at $950 a month and paying a $900 monthly mortgage. She eventually hopes to sell the 950-square-foot home for $135,000, its current appraisal."

http://realestate.msn.com/Buying/Article2.aspx?cp-documentid=6564920>1=35000

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Links sometimes don't copy properly on this site. Article titled: "Bargains: The sunny side of the housing slump" By Judi Hasson, MSN Real Estate March 2008

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If inflation does kick in eventually, wouldn't this be a great tool for the central banks to use as as it is inherently deflationary.The only central bank i can think of which uses the reserve ratio as a tool coupled with interest rates is china, obviously they have an advantage in that they can take a long term view.

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