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House Prices, Credit and Willingness to Lend

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  • SARAH CARRINGTON
  • JAKOB B. MADSEN

Abstract

This paper establishes a Tobin’s q model in which house prices fluctuate around their long run equilibrium due to fluctuations in credit availability and income. It is shown that house prices are positively related to credit in the short run, however, negatively related to the availability of credit in the long run. Using survey data on banks’ willingness to lend and data on disintermediation for the U.S. over a long period and for nine OECD countries over a short period it is shown that the availability of credit is the principal variable driving house prices around their long run equilibrium. Shocks to interest rates and income have only secondary effects on house price fluctuations.

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Bibliographic Info

Article provided by The Economic Society of Australia in its journal The Economic Record.

Volume (Year): 87 (2011)
Issue (Month): 279 (December)
Pages: 537-557

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Handle: RePEc:bla:ecorec:v:87:y:2011:i:279:p:537-557

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  1. Francois Ortalo-Magne & Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," Finance 9810004, EconWPA, revised 25 Oct 1998.
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  5. Joseph E. Stiglitz, 1989. "Money, Credit, and Business Fluctuations," NBER Working Papers 2823, National Bureau of Economic Research, Inc.
  6. Madsen, Jakob B., 2009. "Taxes and the fundamental value of houses," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 365-376, May.
  7. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
  8. David Greasley & Jakob B. Madsen, 2006. "Investment and Uncertainty: Precipitating the Great Depression in the United States," Economica, London School of Economics and Political Science, vol. 73(291), pages 393-412, 08.
  9. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  10. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  11. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
  12. Jakob B Madsen, 2011. "A q Model of House Prices," Development Research Unit Working Paper Series 03-11, Monash University, Department of Economics.
  13. Meen, Geoffrey P, 1990. "The Removal of Mortgage Market Constraints and the Implications for Econometric Modelling of UK House Prices," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(1), pages 1-23, February.
  14. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
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Cited by:
  1. Jakob B Madsen & Hui Yao, 2012. "Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend," Development Research Unit Working Paper Series 56-12, Monash University, Department of Economics.
  2. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 21-38.
  3. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Development Research Unit Working Paper Series 09-11, Monash University, Department of Economics.
  4. Anundsen, André K. & Jansen, Eilev S., 2013. "Self-reinforcing effects between housing prices and credit," Journal of Housing Economics, Elsevier, vol. 22(3), pages 192-212.
  5. Cheng, Lichao & Jin, Yi, 2013. "Asset prices, monetary policy, and aggregate fluctuations: An empirical investigation," Economics Letters, Elsevier, vol. 119(1), pages 24-27.
  6. André K. Anundsen & Eilev S. Jansen, 2013. "Self-reinforcing effects between housing prices and credit: an extended version," Discussion Papers 756, Research Department of Statistics Norway.

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