Credit, house price, institutions and the macroeconomy

Abstract

This study investigates the relationship between mortgage markets and house prices. It also looks at how these are associated with the macroeconomy, particularly the external dimension of the economy (i.e. current account balances) as well as institutions. The study utilises a three-essay approach in which econometric analyses are conducted to examine various dimensions of the relationship between the aforementioned variables in the context of the European Union (EU). The first essay explores the dynamic relationship between credit supply and house prices at both the cross-country and country level by classifying the EU countries. To this end, vector autoregressive (VAR) model is applied. The findings of the study show that there is a dynamic causal relationship between house prices and credit; monetary policy may affect the size and direction of this relationship, but also, this relationship can be different at cross-country and country level even if they are subject to the same monetary policy. Thus, one suggestion is that besides monetary policy, other factors can affect the relationship between mortgage markets and house prices, such as the economic structure, type of housing finance systems and the institutional environment etc. Considering the findings of the first essay, the second essay examines the institutional characteristics of the mortgage credit markets of the EU member countries. The findings of empirical analysis convey there are notable differences between the institutional characteristics of mortgage markets in North and South European countries as well as Central and East European countries and indicate that the institutional environment in the mortgage markets are heterogeneous in nature. In the third essay, the relationship between house prices and current account imbalances is examined and the role of institutions in this relationship also is investigated. For this aim, simultaneous equations modelling is used. The findings of the empirical analysis demonstrate there is a strong positive relationship between house prices and current account imbalances; and credit channel contributes to strength this relationship and that institutional features can affect the relationship between house prices and current account balance and result in different outcome for different countries.