The Long-Run Relationship Between Financial Development and House Prices
45 Pages Posted: 8 Jul 2020
Date Written: June 15, 2020
We examine the relationship between financial development and house prices in the Group of Seven (G7) countries over the period 1870 to 2016. We use parametric panel data models that incorporate interactive fixed effects and non-parametric models that allow us to examine non-linearities and the time-varying nature of the relationship. Our parametric estimates show a positive relationship between financial development and house prices. The results from our non-parametric model reinforce this finding but also show evidence of a negative effect of financial development prior to the mid-twentieth century, suggesting a time-varying non-linear impact. We find that inequality and mortgage loans are mechanisms through which financial development transmits to house prices. Financial crisis moderates the relationship between financial development and house prices, although this works only through sovereign defaults. Our findings are robust to a suite of robustness and sensitivity checks.
Keywords: financial development, house prices, credit, mortgage, inequality
JEL Classification: F65, R21, R31, D63, G21
Suggested Citation: Suggested Citation