International Housing Returns and the Financial Crisis: Disentangling Credit Supply and Demand Shocks

Abstract

We investigate three popular supply-side explanations for the run-up in international housing prices prior to the financial crisis: loose monetary policy, a global savings glut, and deteriorating credit standards. Unlike prior studies, we use both central bank surveys and economic data to identify credit demand and credit supply shocks related to monetary policy, current account deficits, and changing credit standards. Using an unbalanced panel of 57 countries from 1990-2014, we find that none of the three explanations provides an adequate description of global housing prices, particularly prior to the financial crisis. Monetary policy does not explain the observed housing returns, and in fact tight monetary policy is correlated to higher housing returns. Current account deficits, on the other hand, are correlated with higher housing prices, but part of this correlation simply reflects that higher housing demand, and thus higher credit demand, results in larger current account deficits. Finally, we find that changing credit standards are capable of explaining some portion of housing returns, but that these changes can also proxy for demand shocks.