Empirical Studies On Credit And Housing Prices

According to traditional theory and former studies,there might well be a mutual enhancing relationship between housing prices and credit,which may increase financial systemic risks.This paper establishes theoretically a positive feedback system between housing prices and credit,and verifies empirically with data from China,and at last makes suggestions on related policy-making.Through theoretical analysis,the interaction between housing prices and credit is established: housing prices affect credit through wealth effect,balance sheet effect and expectation effect;credit loosens home buyers' credit constraint,and releases operational pressure on house developers.There is a positive feedback between the two.Based on panel data of 35 large and medium cities in China,through cointegration,DOLS and ECM,it is found that: housing price increase and credit expansion are reciprocally causal;departure of housing prices and credit from equilibrium level will generate a trend back to it;housing prices are more sensitive to credit than to income,which means the high housing prices are caused by monetary easing.Through general equilibrium analysis,departure of housing prices and credit from equilibrium level usually occurs in the same direction at same time.At the end of sample period,there is excess credit in the market and we need to beware of real estate bubbles.Through geographical heterogeneity analysis,it is concluded that credit should increase at stable pace in the east while tighten in the mid-west.Through heterogeneity analysis based on housing price/income ratio,high ratio group's ability to recover long term equilibrium is harmed,which means housing bubbles will affect economic stability.The mutual enhancing relationship between housing prices and credit means volatility in housing market will be amplified through banking system.The positive feedback and pro-cyclicality greatly adds to the fragility of financial system.Accordingly,it is suggested regulators closely monitor credit and bubbles in housing market,and establish countercyclical policies and mechanisms.As for the problem of high housing prices in China,it is suggested starting with credit and tightening monetary policy to prevent excess money fluxing into housing market.