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House prices, credit and willingness to lend

Author

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  • Carrington, Sarah J.
  • Madsen, Jakob B.

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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Suggested Citation

  • Carrington, Sarah J. & Madsen, Jakob B., 2011. "House prices, credit and willingness to lend," Working Papers eco_2011_3, Deakin University, Department of Economics.
    • Handle: RePEc:dkn:econwp:eco_2011_3
    DOI: 10.1111/j.1475-4932.2011.00762.x
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    File URL: http://dx.doi.org/10.1111/j.1475-4932.2011.00762.x
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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, vol. 22(3), pages 192-212.
    2. An-Pin Wei & Wei-Ling Huang & Chih-Yuan Yang & Ming-Chi Chen, 2013. "The role of market imperfections in the relationship between housing prices and household credit: Evidence from Taiwan," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 27(2), pages 131-143, November.
    3. Jakob B Madsen & Hui Yao, 2012. "Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend," Monash Economics Working Papers 56-12, Monash University, Department of Economics.
    4. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Monash Economics Working Papers 09-11, Monash University, Department of Economics.
    5. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 21-38.
    6. André K. Anundsen & Eilev S. Jansen, 2013. "Self-reinforcing effects between housing prices and credit: an extended version," Discussion Papers 756, Statistics Norway, Research Department.
    7. Cheng, Lichao & Jin, Yi, 2013. "Asset prices, monetary policy, and aggregate fluctuations: An empirical investigation," Economics Letters, Elsevier, vol. 119(1), pages 24-27.

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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