The impact of monetary policy shocks on residential investment and house prices in small euro area economies

In this paper we assess the implications for both residential investment and house prices across small euro area economies of shocks to both conventional and unconventional monetary policy. A period of monetary tightening, like that seen across the euro area in 2023, may have significant implications for the residential property market as it can have an adverse impact through both a demand-side channel (reduced affordability for prospective homeowners) and on the supply-side (increase in funding costs for the construction sector). Using a structural VAR approach where conventional and unconventional monetary policy shocks are identified by explicitly imposing sign restrictions, we examine the implications for both housing supply and residential property prices due to a shock to monetary policy across small euro area countries. This paper contributes to the literature by providing new evidence on how both conventional and unconventional monetary policy affect residential property markets in small euro area economies, revealing substantial cross-country differences. The findings highlight the need for national policymakers to complement ECB policy with flexible, country-specific housing and fiscal strategies to support supply targets amid changing monetary conditions.