Bank Lending Effect on German Commercial Property Prices

This paper analyzes the effects of bank lending on German commercial property prices. The theory on the role of financial intermediaries in business cycle activity (with variations on this theme referred to as models of the credit channel, agency cost models, or financial accelerator models) states that lending activity is characterized by asymmetric information between borrowers and lenders. As a consequence, interest rates may not move to clear lending markets (as in models with moral hazard and adverse selection elements) or .rms.net worth may play a critical role as collateral in in.uencing lending activity (as in models with agency costs). While the theory is concrete, the debate on the empirical support for these models continues. In this paper, our goal is to continue in exploring this debate by estimating a structural VAR model using German commercial property data from 1975 to 2003. Unlike other previous empirical results in this literature, our results show a strong negative correlation between growth in property prices and growth in credit. Moreover, the regional German commercial property sector is affected by its own idiosyncratic factor rather than aggregate macroeconomic variables.