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

Abstract

We use the price and quantity of credit to distinguish credit supply shocks from credit demand shocks to examine international housing returns around the financial crisis. We find little evidence to support three popular credit supply explanations for the run-up in international housing prices before the financial crisis. Importantly, we show that common credit supply proxies often represent credit demand shocks because they only capture quantity supplied but ignore price. Furthermore, credit demand shocks are more common than supply shocks in countries that experience a housing reversal. While we do find that credit supply plays a role in the housing run-up, the impact of credit supply shocks on housing prices during the run-up is primarily through negative shocks driving prices down, rather than the positive supply shocks driving them up.