Abstract
This paper performs an empirical study on house loans, interest rates, unemployment, and house rent prices relationship in Germany, France, Spain and Italy from the year 2003 to 2018. We look for the cointegration and causality relationship between the house loans and macro variables with the help of the Vector error correction model (VECM) and Granger causality methods. We investigate whether variables with monthly data explain better the relationship and causal effects between the variables. We find a long term cointegrating relationship between the real house loans and interest rates, unemployment and house rent prices for France, Spain, and Italy, but not for Germany. On average the equilibrium in house loan development is reached from 4 to 8 years, meaning that long term equilibrium exists, but the variables reach it in a rather long time period. The ECB deposit facility rate included as an exogenous variable in four countries gained no significant power in explaining the short term changes of house loans in any of the country. We reveal a complex interaction between the bank’s credits and unemployment, interest rates, house rental prices in the paper.
Highlights
The development of the private credit market during the last two decades is as of interesting study, because the period between 2003 and 2018 covers full business cycle – two expansions, one financial crisis, and one recovery period just before the COVID-19 crises.We are interested in whether high-frequency data, like monthly time series, can establish more fruitful results throughout the business cycle for our research object – house loans to private individuals
We have found that none of the first differences of variables in analyses did not have Granger causality towards the log of real house loans in any of the four countries
The opposite Granger causality effect of real house loans towards the variables was found in France with a 10% significance level only and in Spain with a 5% significance level
Summary
The development of the private credit market during the last two decades is as of interesting study, because the period between 2003 and 2018 covers full business cycle – two expansions, one financial crisis, and one recovery period just before the COVID-19 crises. We are interested in whether high-frequency data, like monthly time series, can establish more fruitful results throughout the business cycle for our research object – house loans to private individuals. Unemployment is measured and available in monthly frequency It is widely used by other authors (Acemoglu, 2001; Dromel, Kolakez, and Lehmann, 2010; Petrosky, 2014; Bethune et al, 2015), who analyzed private credit or house loans. We have chosen VECM approach because of the non-stationary data, possible long term cointegration between variables and less strict restrictions over economic dependencies of variables in the model. In VECM analyses we have included ECB deposit facility rate as an exogenous variable in 4 countries to find out the short term effects of the ECB instrument impact upon the house loan development
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