The Central Bank should raise the interest rates to suppress the price of housing

Abstract

Abstract

The Central Bank plays a pivotal role in influencing interest rates, which significantly affect macroeconomic variables such as inflation, consumption, and particularly the housing market. This report explores the relationship between rising interest rates and housing prices from multiple perspectives, including economic theory, historical trends, regional differences, and real-world case studies. It aims to assess whether increasing interest rates can be an effective tool for managing housing affordability and market stability, while also considering the broader economic implications. This also analyzes the mechanism of interest rate changes and their direct effects on the housing market. It is noted that while theory suggests a negative correlation between interest rates and housing prices, the relationship is often influenced by broader economic conditions such as employment rates, income growth, and supply constraints. Historical data from Taiwan and the United States reveal that although interest rate hikes can dampen price growth, they do not always lead to immediate or sustained price drops. The report also highlights regional differences, noting that urban areas are typically more sensitive to interest rate changes due to higher population density, stricter zoning laws, and greater speculative activity, while non-urban areas tend to be more resilient due to greater supply elasticity and lower leverage. The pros and cons of raising interest rates are examined in detail. On the one hand, higher rates can discourage speculative investment, reduce housing demand, and help correct overheated markets. On the other hand, they can also reduce affordability for first-time buyers, shrink borrowing capacity, and slow overall economic activity. In extreme cases, aggressive rate hikes could trigger a recession or increase rental prices, as more households are priced out of homeownership. Through case studies in countries like Canada and New Zealand, the report demonstrates how central banks have successfully used interest rate hikes to moderate unsustainable housing price growth. These examples provide empirical support for the effectiveness of interest rate policy, while also underscoring its limitations. In conclusion, while increasing interest rates is a powerful short-term strategy to stabilize housing markets, it must be implemented carefully and in conjunction with long-term structural policies, such as boosting housing supply and improving affordability. A balanced, multi-pronged approach is essential to achieving sustainable and equitable housing market outcomes.