How Monetary Policy Determines Housing Prices

US tax reform and home prices:Neighbourhood in San Francisco

As we can see from the chart below, San Francisco and Houston operate under different monetary authorities. Prices have exploded in San Francisco over the years, and done very little in Houston.

Blog HPI SFO Hous


Okay, getting serious for a moment, we can see that monetary policy can easily be trumped by restrictions in supply (George Selgin has noted this, in relation to agricultural products). Tightening up monetary policy will not bring about a greater supply of housing, just as monetary tightening will not increase supply of corn in a drought. In fact, tighter money might restrict new housing, or dissuade farmers from planting corn.

Housing is a large component of living costs, about 30% nationally though more than 50% along the coasts, in many cities. Rising housing costs impact inflation.


While issues such as taxes and trade get the headlines, a major and growing issue in the U.S. is ubiquitous restrictive property zoning, and the false signals zoning sends to the Fed. Indeed, the “housing bubble” that led to Fed over-tightening in 2007 barely surfaced in Houston, but was highly prominent in San Francisco.  Obviously, the “housing bubble” was not Fed-induced.

Moreover, if housing was in a “bubble” in San Francisco in 2008, it is even more so now.

In truth, regional housing prices are highly conditional upon regional employment growth, property restrictions and inflows of foreign capital. Nations which run large chronic trade deficits tend to have rising house prices, as seen in Hong Kong, Australia, New Zealand, Canada, Great Britain and parts of the U.S.

Orthodox macroeconomics and conventional monetary policies are ill equipped to deal with this emerging econoscape, which does not fit neatly in prevailing theories and ideologies. Free trade deficits can explode housing prices, while tighter money can actually exacerbate housing shortages.

For investors, this presents a tricky playing field. The Fed still thinks monomaniacally about inflation, threatening recession. The prospects for well-placed residential REITs or investment vehicles acquiring class B housing in restricted markets are interesting.

Unfortunately, the U.S. appears committed to both trade deficits and property zoning for the foreseeable future.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.