Local market conditions raging from supply and demand to local population growth have a substantial impact on how federal monetary policy affects home prices, according to new study to be published in the Journal of Housing Economics next month.

Motivated by the fact that the period of house price inflation prior to the economic downturn in 2008-9 was characterized by significant differences in inflation rates across markets, economists at the Swiss Institute of Banking and Finance and Middle Tennessee State University found that the vast differences in home price inflation rates experienced at the local level, especially before 2006, can be tied to differences in local demand and supply conditions that systematically and predictably cause monetary policy to different local consequences.

‘Why did we see so very different house price inflation rates across MSAs when all MSAs are subject to the same federal funds rate in a highly integrated financial market?2 The key point of this study is to show empirically that the vast differences in home price inflation rates experienced at the MSA level, especially prior to 2006, can be tied to differences in local demand and supply conditions that systematically and predictably cause monetary policy to have rather different consequences at the local level.3

Local population growth is a key demand side factor and the percentage of undevelopable land a primary supply side factor that determine how national monetary policy impacts house price inflation rates at the MSA level. the study found. MSAs with a high share of undevelopable land or strong population growth are far more prone to experience house price inflation from a reduction in the federal funds rate than MSAs without those characteristics.

A higher quality of life, by contrast, appears to moderate the impact of a change in the federal funds rate on house price inflation. For the larger set of MSAs contained in the FHFA data set, there is evidence that large values for land use restrictions and high income growth during the period before the house price crash in 2007-8 are also important to explain a strong response of MSAs to changes in monetary policy.

The economists, Roland Füss and Joachim Zietz, used Case/Shiller monthly house price index data for 19 MSAs from June1992 to December 2014 and FHFA quarterly house price index data for 94 MSAs from March 1992 to April 2014.