High housing costs have effectively insulated the economy from the power of the central bank.
April 26, 2026
Original Paper
Housing Financialization and Monetary Policy Insulation: The Rm Index from China (2008-2025)
SSRN · 6644223
The Takeaway
Extreme household spending on real estate causes the effectiveness of the money supply to collapse by over 75%. When a population is trapped in a housing bubble, lowering interest rates no longer stimulates the broader economy. Money that should go toward new businesses or consumption is instead swallowed by mortgages and rent. This creates a state of monetary policy insulation where traditional economic levers stop working. It means a country can remain stuck in a slump despite massive amounts of stimulus.
From the abstract
China's aggressive monetary easing since 2008—over ten RRR cuts and 500bps rate reductions—coincided with real GDP growth elasticity to M2 collapsing from 0.48–0.50 to 0.12 by 2025. This paper introduces the Rm index, Rmₜ = (RRRₜ × iₜ) / (THEₜ / Incomeₜ), quantifying housing-driven monetary policy insulation as household housing expenditure surged past 35% of disposable income. Peaking at 0.077 in 2008, Rm fell monotonically below the 0.01 exhaustion threshold post-2023, when conventional m