Monetary policy and house price heterogeneity: Evidence from the U.K

This paper investigates the effects of monetary policy shocks on regional house prices in the U.K. The empirical results indicate significant heterogeneity in the impact of monetary policy on regional house prices. Focusing on the source of heterogeneity, the paper suggests a demand-side factor to be a major driver. The regions with relatively affordable housing exhibit higher sensitivity to monetary policy than those with less affordable housing. The prevailing view that region-specific housing supply constraints and regional housing supply elasticity are responsible for the heterogeneous response of regional house prices to monetary policy shocks is not confirmed by the empirical findings. •Monetary policy shocks affect regional house prices in the U.K. heterogeneously.•Evidence of demand-driven heterogeneity.•Regions with relatively affordable housing face a higher increase in house prices after a monetary expansion.•Monetary policy easings increase house prices by more when housing is affordable and households can issue mortgages to purchase them.