Nonlinearities in the Relationship Between House Prices and Credit. Euro Area Versus Anglo-Saxon Economies

The critical role of house prices for economic and financial stability has been widely acknowledged since the global financial crisis. While house prices showed spectacular increases in the pre-crisis period, their fall thereafter was accompanied by deep recessions in many parts of the world economy. In this paper, the linkages between credit and house prices are explored for countries with more bank (Germany, France) and market based financial systems (UK, US). To take potential nonlinearities into account, Markov switching and threshold models are applied, both in a VAR setting. Besides house prices and credit, business and monetary conditions enter as controls. The analysis reveals the presence of nonlinearities in the development of credit and house prices. Loose credit conditions can accelerate house prices. At the same time, house prices serve as a collateral. Their rise can spur the amount of credit available to households. While credit and house prices are determined interdependently, asymmetries are detected with respect to the sequence of the effects. The house price response to changing loans is quite strong but limited to the short run. In contrast the credit response to house price shocks is more persistent, most notably in the US