Household borrowing and metropolitan housing price dynamics - Empirical evidence from Helsinki

Elias Oikarinen*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This article argues that, especially in the absence of sufficient direct data on credit constraints, it is reasonable to add a household debt variable in an empirical model studying housing price dynamics. This is because household borrowing is likely to reveal information regarding the credit constraints faced by households. Moreover, debt may also give information on expected income growth and interest rate movements. The aim of this study is to examine empirically if household borrowing data, indeed, is of importance in a dynamic housing price model. In line with the prior expectations, it is found that housing appreciation in the Helsinki Metropolitan area is Granger caused by the household debt-to-GDP ratio both in the short and in the long run. Causality from the housing market to credit, in turn, seems to run only through a cointegrating long-run relation. While the estimated long-run relation between housing prices, income and debt-to-GDP ratio appears to have remained stable through the sample period (1975Q1-2006Q2), the short-run dynamics changed somewhat due to the financial liberalization in the late 1980s. The stability of the long-run relation implies that the loan data are able to cater, at least to a notable extent, for the effect of the changes in Finnish households' liquidity constraints on housing demand. In line with previous literature, it is also found that housing price adjustment is sluggish and includes notable backward-looking features. (C) 2009 Elsevier Inc. All rights reserved.

Original languageEnglish
Pages (from-to)126-139
Number of pages14
JournalJournal of Housing Economics
Volume18
Issue number2
DOIs
Publication statusPublished - Jun 2009
MoE publication typeA1 Journal article-refereed

Keywords

  • Housing prices
  • Dynamics
  • Borrowing
  • Credit
  • Predictability
  • LABOR INCOME UNCERTAINTY
  • CREDIT CONSTRAINTS
  • MARKET DYNAMICS
  • MODEL
  • HOMEOWNERSHIP
  • FUNDAMENTALS
  • MACROECONOMICS
  • FLUCTUATIONS

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