Interest rate hikes and housing market trends : what is the relationship between central bank interest rate changes and housing market dynamics?

Abstract

This study examines the relationship between central bank interest rate changes and housing market dynamics (specifically house prices, mortgage lending volumes, and wage growth) in the Eurozone, with an emphasis on Malta. Using secondary data and a Vector Autoregression (VAR) framework augmented by Impulse Response Functions, Forecast Error Variance Decomposition, and Granger Causality tests, the analysis compares Malta with selected Eurozone peers. The findings indicate that in Malta, a monetary tightening (interest rate hike) has a muted and short-lived impact on house prices and loan volumes, often statistically insignificant. In contrast, similar interest rate shocks in larger Eurozone economies lead to noticeable declines in house prices and a clear slowdown in credit growth, reflecting a more responsive monetary transmission in those markets. Consistently, only a small fraction of house price variance in Malta is attributable to interest rate changes, whereas in bigger economies these shifts account for a greater share of housing market fluctuations. Granger causality tests further show no significant causal link from policy rates to Malta’s housing market indicators, while in several other Eurozone countries interest rate movements significantly precede changes in housing prices and lending volumes. These Malta-specific findings suggest that Malta’s housing sector is less sensitive to central bank rate adjustments, likely due to unique local structural factors. Overall, the study highlights heterogeneous monetary policy impacts across the Eurozone: Malta’s housing market exhibits relative resilience to interest rate shifts compared to the more reactive housing markets of larger economies.