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House Prices, Credit And Willingness To Lend

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  • Sarah J. 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 US 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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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2011_3.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2011_3.

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Date of creation: 23 Mar 2011
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Handle: RePEc:dkn:econwp:eco_2011_3

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Keywords: Willingness to lend; Tobin’s q. House prices;

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  1. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 1093-1127, June.
  2. Markus K Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," FMG Discussion Papers, Financial Markets Group dp579, Financial Markets Group.
  3. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  4. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 78-98, March.
  5. Ortalo-Magne, Francois & Rady, Sven, 1999. "Boom in, bust out: Young households and the housing price cycle," European Economic Review, Elsevier, Elsevier, vol. 43(4-6), pages 755-766, April.
  6. 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, London School of Economics and Political Science, vol. 73(291), pages 393-412, 08.
  7. 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.
  8. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 64(187), pages 307-22, December.
  9. 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, Department of Economics, University of Oxford, vol. 52(1), pages 1-23, February.
  10. Madsen, Jakob B., 2009. "Taxes and the fundamental value of houses," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 39(3), pages 365-376, May.
  11. 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, University of Chicago Press, vol. 96(3), pages 568-92, June.
  12. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 59(1), pages 1-30, 02.
  13. Jakob B Madsen, 2011. "A q Model of House Prices," Development Research Unit Working Paper Series, Monash University, Department of Economics 03-11, Monash University, Department of Economics.
  14. 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.
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Cited by:
  1. Anundsen, André K. & Jansen, Eilev S., 2013. "Self-reinforcing effects between housing prices and credit," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(3), pages 192-212.
  2. André K. Anundsen & Eilev S. Jansen, 2013. "Self-reinforcing effects between housing prices and credit: an extended version," Discussion Papers, Research Department of Statistics Norway 756, Research Department of Statistics Norway.
  3. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Development Research Unit Working Paper Series, Monash University, Department of Economics 09-11, Monash University, Department of Economics.
  4. Jakob B Madsen & Hui Yao, 2012. "Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend," Development Research Unit Working Paper Series, Monash University, Department of Economics 56-12, Monash University, Department of Economics.
  5. Cheng, Lichao & Jin, Yi, 2013. "Asset prices, monetary policy, and aggregate fluctuations: An empirical investigation," Economics Letters, Elsevier, Elsevier, vol. 119(1), pages 24-27.
  6. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 82(1), pages 21-38.

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