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Credit composition and housing price dynamics: a disaggregation approach

Credit composition and housing price dynamics: a disaggregation approach
Credit composition and housing price dynamics: a disaggregation approach
While credit plays an instrumental role in housing price dynamics, existing work has produced conflicting evidence of its real impact. This paper reconciles various inconclusive findings via a disaggregation strategy to decompose aggregate credit into credit-to-the-real economy (cr) and credit-to-the-asset markets (cf ). We argue that these two credit components exert theoretically expected and distinct impacts on housing prices, identified separately through a housing demand and a housing supply credit-circulation channel. Using an international panel dataset and treating for periodic cycles, our panel VAR estimations show that cr and housing prices depict a mutually reinforcing positive relationship. However, cf exerts a negative but negligible impact on housing prices in the short-run; it has a strong and positive effect in the long-run. Further, controlling for effects of economic policy uncertainty strengthens the interactions between housing prices and the two credit components. Our results are robust and suggest that close monitoring of credit allocation to housing demand and supply sides, as well as the extent of pump-priming resource allocation to the real economy, should be of interest to policymakers.
Business cycles, Credit disaggregation strategy, Economic policy uncertainty, International housing price dynamics, Panel VAR
Duan, Kun
09eaaadf-6d46-406b-9b51-11edc63bea49
Parhi, Mamata
5e5c7296-d815-4bb7-be9d-cf7a59164fd9
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Duan, Kun
09eaaadf-6d46-406b-9b51-11edc63bea49
Parhi, Mamata
5e5c7296-d815-4bb7-be9d-cf7a59164fd9
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

Duan, Kun, Parhi, Mamata and Wolfe, Simon (2021) Credit composition and housing price dynamics: a disaggregation approach. The European Journal of Finance (REJF). (doi:10.1080/1351847X.2021.1959366).

Record type: Article

Abstract

While credit plays an instrumental role in housing price dynamics, existing work has produced conflicting evidence of its real impact. This paper reconciles various inconclusive findings via a disaggregation strategy to decompose aggregate credit into credit-to-the-real economy (cr) and credit-to-the-asset markets (cf ). We argue that these two credit components exert theoretically expected and distinct impacts on housing prices, identified separately through a housing demand and a housing supply credit-circulation channel. Using an international panel dataset and treating for periodic cycles, our panel VAR estimations show that cr and housing prices depict a mutually reinforcing positive relationship. However, cf exerts a negative but negligible impact on housing prices in the short-run; it has a strong and positive effect in the long-run. Further, controlling for effects of economic policy uncertainty strengthens the interactions between housing prices and the two credit components. Our results are robust and suggest that close monitoring of credit allocation to housing demand and supply sides, as well as the extent of pump-priming resource allocation to the real economy, should be of interest to policymakers.

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Final-EJF-Credit - Accepted Manuscript
Restricted to Repository staff only until 30 January 2023.
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More information

Accepted/In Press date: 19 July 2021
e-pub ahead of print date: 30 July 2021
Keywords: Business cycles, Credit disaggregation strategy, Economic policy uncertainty, International housing price dynamics, Panel VAR

Identifiers

Local EPrints ID: 450752
URI: http://eprints.soton.ac.uk/id/eprint/450752
PURE UUID: 2458a781-0faf-4900-a411-849e06d24018
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535

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Date deposited: 10 Aug 2021 16:30
Last modified: 28 Apr 2022 01:37

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Contributors

Author: Kun Duan
Author: Mamata Parhi
Author: Simon Wolfe ORCID iD

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