The ripple effects of monetary policy on housing and consumption

31 July 2025

By Niccolò Battistini and Johannes Gareis

Monetary policy decisions affect the economy by influencing how much people can afford, invest and consume. The housing market is an important channel for this: changes in monetary policy affect mortgage interest rates, which in turn affect housing sales. However, since buying a home often leads to extra purchases of home goods, such as furniture and kitchen appliances, policy changes can also affect consumption. In this blog post, we explore how the ECB’s recent monetary policy changes have rippled through the economy, affecting housing affordability, housing sales and home goods consumption.

Monetary policy and its impact on home buyers

Let’s recall what happened between mid-2022 and mid-2023. The ECB raised key interest rates faster than ever before to combat rising inflation and restore economic stability. After holding interest rates steady from October 2023 to June 2024, the ECB then began to cut as inflation gradually eased. So how did this affect what potential home buyers could afford?

The ECB’s monetary policy can make housing significantly more or less affordable, mainly through its impact on mortgage rates, which can be decisive for home purchase decisions. To illustrate this, we construct a simple affordability index that compares income and mortgage payments for a typical home buyer in the euro area.^[1] The index rises if household income increases, mortgage rates fall, or house prices decrease. A rise in the index signals housing becoming more affordable and a fall the opposite.

The striking ups and downs in housing affordability from the first quarter of 2005 to the first quarter of 2025 are evident from Chart 1. The average value of the affordability index over this period is set to 100: values above 100 indicate housing was more affordable than the average for 2005-25. Housing was least affordable during the financial crisis of 2008 and most affordable at the end of 2016. Then, from 2017 to 2021, it gradually declined from its peak – but took a plunge in 2022. By mid-2023, affordability had fallen well below its long-term average. Since then, it has started to recover slightly.

We can see from Chart 2 how each key driver of affordability has contributed to changes in the index since the last quarter of 2021. We chose this starting point as it coincides with the ECB announcing the normalisation of its policy after the pandemic easing but precedes the rate hikes as of mid-2022. A closer look reveals that affordability declined significantly from 2022 until the end of 2023 despite increasing income. At that time the rise in mortgage rates outpaced the recovery in income and the slight decline in house prices. However, once the ECB began to lower interest rates, affordability recovered slightly. This improvement was helped along by robust income growth but dampened by rising house prices. Therefore, ECB interest rate cuts helped make housing more affordable – though it remained far less affordable than at the end of 2021.

How housing sales can affect consumption

We can clearly see that changes in monetary policy can make it harder or easier for potential home buyers to make a purchase. When monetary policy eases and housing becomes more affordable, more people tend to buy homes. And in consequence, housing sales typically trigger additional consumer spending, as new homeowners shop for a new couch or renew their roof. Conversely, when tighter monetary policy makes housing less affordable and housing sales decline, we see the opposite and additional spending typically drops. But how much did housing sales actually change following the ECB’s interest rate changes? And what ripple effects has this had on the broader economy?

To better understand these dynamics, we estimate the typical effects of monetary policy changes on housing sales and home goods consumption. We particularly focus on how housing sales transmit the impact of monetary policy on home goods consumption. Specifically, we calculate how housing sales and home goods consumption react when interest rates change unexpectedly due to surprise shifts in monetary policy. We then simulate a hypothetical scenario where housing sales remain unchanged. This helps us to determine how home goods consumption would behave in the absence of this channel. The difference between the actual and hypothetical responses captures the “housing sales channel”, or how monetary policy typically affects home goods consumption via housing sales. Finally, we illustrate how housing affordability, housing sales, and home goods consumption have evolved since late 2021, highlighting the ripple effects of the ECB’s recent monetary policy changes.

The results from our model reveal that monetary policy impacts not only housing sales but also has significant effects beyond the housing market. Chart 3 shows that a surprise increase in short-term interest rates by 25 basis points typically leads to declines in housing sales and home goods consumption of around 2% and 0.3% respectively after about three years (blue lines). By contrast, if housing sales remain constant, home goods consumption declines by only 0.1% (yellow lines). This suggests that monetary policy has a sizeable impact on home goods consumption and that housing sales amplify these effects.

Chart 3

Typical reaction of housing sales and home goods consumption to a 25-basis-point interest rate shock

(percentages)

Finally, Chart 4 captures the big picture on housing affordability, housing sales and home goods consumption since the last quarter of 2021. Here, too, the ripple effects of the ECB’s recent monetary policy changes on housing and consumption are clearly visible. During 2022 and much of 2023, as housing affordability deteriorated, housing sales slumped. This was accompanied by a rapid reduction in home goods consumption in 2022 and 2023.^[2] From 2024 onwards, as housing affordability first stabilised and then improved, housing sales also bottomed out before picking up again. These dynamics have led to a stabilisation of home goods consumption since the second quarter of 2024, and – according to preliminary data – an incipient recovery in the second quarter of 2025.

A bright outlook overshadowed by uncertainty

All in all, the ECB’s recent monetary policy decisions have left their mark on housing affordability, housing sales and home goods consumption. Looking ahead, the improvements in housing affordability are likely to support a continued recovery in housing sales in 2025. This positive momentum is expected to extend to home goods consumption over time and help boost overall demand in the economy. However, challenges remain. The repeated announcements of US tariffs, combined with increasing trade uncertainty and geopolitical tensions, could negatively impact housing sales and consumption. Understanding and adapting to these shifting conditions will be crucial for policymakers and households alike.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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References:

Bachmann, R. and Sims, E. (2012), “Confidence and the transmission of government spending shocks”, Journal of Monetary Economics, Vol. 59, No 3, pp. 235-249, April.

Battistini, N., and Gareis, J. (2024), “Housing investment and the user cost of housing in the euro area”, Economic Bulletin, Issue 3, ECB.

Kouvavas, O., and Rusinova, D. (2024), “How big is the household housing burden? Evidence from the ECB Consumer Expectations Survey”, Economic Bulletin, Issue 3, ECB.

Lenza, M. and Primiceri, G. (2022), “How to estimate a vector autoregression after March 2020”, Journal of Applied Econometrics, Vol. 37, No 4, pp. 688-699, June/July.