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Economic Research

The Relationship between Mortgage Markets and House Prices: Does Financial Instability Make the Difference?

Santiago Carbó Valverde and Francisco Rodríguez Fernández
CenFIS Working Paper 10-02
February 2010

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During the late 1990s and up to 2007, several countries experienced sharp increases in house prices. These episodes are usually mentioned among the causes of the world’s recent economic and financial turmoil. The dramatic growth in bank lending during this period has been held broadly responsible for these market dynamics. However, the empirical relationship between mortgage credit and house prices remains largely unexplained. This paper analyzes the relationship between house prices and mortgage credit in Spain, where house prices and mort­gage credit have experienced high growth in recent years prior to the financial crisis. We employ a quarterly database from 1988Q4 to 2008Q4. Using cointegration analysis and vector error–correction (VEC) models, we find that both house prices and mortgage credit interact in the short and long run. The results also suggest that a regime shift in mortgage lending occurred in 2001 in Spain—where mortgage credit securitization substantially grew—that increased the economic significance of mortgage lending’s impact on house prices.

JEL classification: R21, G12, G21

Key words: house prices, mortgages, banks


The authors are grateful for comments from discussants Anthony Murphy and José García Solanes as well as other participants in the XXII Simposium Moneda y Crédito. The authors also thank Clemens Kool, Douglas Evanoff, Anna Paulson, Gene Anronmin, and other participants in the annual meetings of the Midwest Finance Association in Chicago in March 2009. They acknowledge financial support from the Spanish Ministry of Science and Innovation and FEDER (ECO2008-05243/ECON). The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Santiago Carbó Valverde and Francisco Rodríguez Fernández are at the Universidad de Granada. Please address questions regarding content to Santiago Carbo Valverde, Departamento de Teoría e Historia Económica, Facultad de CC EE y Empresariales, Universidad de Granada, Campus de Cartuja s/n, 18071, Granada, Spain, +34 958 243717, +34 958 249995 (fax), scarbo@ugr.es.

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