The Short- and Long-Run Relationship Between House Prices and Bank Credit in Developed and Emerging Market Economies: A Comparative Study

Abstract

This study compares the short- and long-term relationships between house prices and bank credit in developed and Emerging Market Economies. This fact is an essential issue because most financing is facilitated by bank credit. Using quarterly data from 22 developed and six Emerging Market Economies and the panel autoregressive distributed lag model method, this study found that real house prices are the prominent factor of bank credit. Moreover, the magnitude of house prices and gross domestic product relationship with domestic bank credit is considerably greater in Emerging Market Economies than in developed nations. Meanwhile, the foreign interest rate on bank credit is nearly four times greater in Emerging Market Economies. Further, the exchange rate-credit relationship is positive for developed countries, whereas negative for Emerging Market Economies. Therefore, authorities maintaining financial stability must pay close attention to real house price dynamics. Moreover, Emerging Market Economies must also consider the exchange rate and foreign interest rates in managing credit growth.

JEL: E51, E52, E47, F65, G21