Residential mortgages, the real estate market, and economic growth: evidence from Europe

Abstract

Purpose The purpose of this paper is to evaluate the impact of macroeconomic condition and real estate price trend on the amount of residential loan. Design/methodology/approach The paper using a sample of 16 European Countries for the time period 2007–2015 evaluates the impact of change in the gross domestic product (GDP) growth and the inflation rate on the amount of residential loans. The analysis is performed by using a vector autoregressive (VAR) and generalized VAR approach for the full sample and for each country considered. Findings For a short-term horizon, shocks to mortgages, the house price index (HPI) and the GDP have a positive effect on the GDP, a shock to the amount of mortgages has a positive effect on the mortgage supply and a shock to the GDP has a negative effect on HPI. The main results for the long-term horizon are that a GDP shock has a positive and persistent effect on the amount of mortgages, a shock to HPI has a negative and persistent effect on mortgages and a shock to the amount of mortgages seems to have no persistent effect on the GDP or the HPI. Moreover, the analysis shows that a spillover risk among countries exists and a GDP shock in a European area has an effect on the GDP, real estate prices and residential mortgages in almost all European countries. Practical implications Results obtained show that both macroeconomic and housing prices shocks matter for the real estate lending and the effect are different in the short- and in the medium–long-term horizon. Results are also different country by country and they are affected by the level of financial development of the country. Originality/value The paper studies a lending crisis period and evaluates for the European market the impact of shock on macro-variables for mortgages focusing the attention for the first time only on residential mortgages.