To Segregate or to Aggregate? : Uncovering the Real Effects of Credit on Housing Price Dynamics

Credit is a crucial instrument in asset price determination, yet existing research has produced conflicting evidence on its real impact, especially during episodes of heightened uncertainty. This paper develops a framework to show that by segregating credit into credit to the real economy and credit to the asset markets a clear picture of its real effects on housing demand and supply channels emerge. Through this mechanism, we establish a meaningful relationship between credit and housing prices. Using a quarterly dataset for nine industrialized countries, our panel VAR estimation shows that credit to the real economy and housing prices depict a positive bi-directional relationship, whereas credit to the asset markets exerts a negative but negligible impact on housing prices in the short-run, and a strong positive effect in the long-run. Robustness tests confirm our baseline predictions