It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market since the 1980s, has had implications for the Dutch housing market. In this paper we introduce a new method to estimate a credit condition index (CCI). The credit conditions index represents changes in the supply of credit over time, apart from changes in interest rates and income. Examples of these changes include (1) the development of markets for financial futures, options, swaps, securitized loans and synthetic securities which allowed for easy access to credit for financial intermediaries, (2) more sophisticated risk management, for example improved initial credit scoring, (3) changes in risk-perception by financial intermediaries due to changes in the macro-economic environment, like rate of unemployment, (4) introduction of new mortgage products, (5) reduced transaction costs and asymmetric information with innovations of IT, telephony and data management and (6) financial liberation. Financial liberation is the relaxation or tightening of credit controls like liquidity ratios on banks, down-payment requirements, maximum repayment periods, allowed types of mortgages, loan-to-value and loan-to-income ratios, etc. The credit conditions index is estimated as an unobserved component in an error-correction model in which the average amount of mortgage is explained by the borrowing capacity and additional control variables. The model is estimated on data representing first time buyers. For first time buyers we can assume that the housing and non-housing wealth is essentially zero. The credit condition index is subsequently used in an error-correction model for house prices representing not only first time buyers, but all households. The models are estimated using quarterly data from 1995 to 2012. The estimated credit condition index has a high correlation with the Bank Lending Survey, a quarterly survey in which banks are asked whether there is a tightening or relaxation of (mortgage) lending standards compared to the preceding period. The credit condition index has explanatory power in the error-correction model for housing prices. In real terms house prices declined about 25% from 2009 to 2012. The estimation results show that 12% point of this decline can be attributed to a decline in the credit conditions index.
