The interaction between housing prices and housing credit: evidence from a country with rapid credit accumulation

Abstract

Purpose: This paper aims to investigate the mutual dependence between housing prices and housing credit in Estonia, a country that experienced rapid debt accumulation during the 2000s and big swings in house prices during that period. Design/methodology/approach: The authors use Bayesian econometric methods on data spanning 2000–2015. Findings: The estimations show the interdependence between house prices and housing credit. More importantly, negative housing credit innovations had a stronger effect on house prices than positive ones. Originality/value: The asymmetry in the linkage between housing credit and house prices highlights important policy implications, in that if central banks increase capital buffers during good times, they can release credit conditions during hard times to alleviate the negative spillover into house prices and the real economy.