SDG 8: Decent Work and Economic Growth | SDG 11: Sustainable Cities and Communities
Institutions: Reserve Bank of India (RBI) | Ministry of Finance | Ministry of Housing and Urban Affairs
A new paper from the International Monetary Fund (IMF) looks at what happens to the housing market when a countryβs central bank (like the RBI in India) raises the main interest rate, which makes home loans and borrowing more expensive.
The study found that raising interest rates is much more effective at cooling down housing markets where prices are already too high. In these βovervaluedβ areas, meaning house prices have surged far ahead of what people pay to rent them, the interest rate hike causes prices to drop faster and more significantly.
The research shows this rapid correction is mainly because investors back out. People or groups buying homes primarily as investments (to rent or resell, not to live in) are the most sensitive to higher borrowing costs. When the central bank makes loans expensive, these investors quickly pull away, stopping the upward surge and acting as a brake on an overheating market.
The key takeaway for policymakers is that raising interest rates is a surprisingly powerful tool for managing a housing boom, helping to stabilize prices and prevent a risky bubble from bursting later.
Follow the full report here:
IMF Working Paper WP/25/207