Private Credit and Housing Prices in the European Union Perspective

Abstract

The interaction between credit supply and housing prices can have an important effect on the economy because developments in either the housing markets or the mortgage markets can influence the whole financial sector or even the economy. In fact, the US subprime mortgage crisis which started in the second half of 2007 confirmed the importance of the interaction between both markets. Although there are numerous studies on the interaction between credit and housing prices at a country level, there are few cross-country studies. the first aim of the study is to examine the dynamic relationship between private credit and housing prices at both cross- country and country level in the EU. Secondly, the effect of the different monetary strategy within the EU on this relationhip will be investigated. Thirdly, the direction and size of this interaction will be explored by considering the different sub-samples as well as some individual countries in the EU. For this purpose, two methods are used: the vector autoregressive (VAR) model and the simultaneous equations model. The latter is applied for robustness check. The findings of the study show that the direction and size of this interaction change among the sub-groups of the EU. This is the same for the individual countries in the Eurozone.