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Discussion Paper Details

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Title: The Financial Transmission of Housing Booms: Evidence from Spain

Author(s): Alberto Mart�n, Enrique Moral-Benito and Tom Schmitz

Publication Date: June 2018

Keyword(s): credit, Financial Frictions, Financial Transmission, housing booms, investment and Spain

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: What are the effects of a housing bubble on the rest of the economy? We show that if firms and banks face collateral constraints, a housing bubble initially raises credit demand by housing firms while leaving credit supply unaffected. It therefore crowds out credit to non-housing firms. If time passes and the bubble lasts, however, housing firms eventually pay back their higher loans. This leads to an increase in banks' net worth and thus to an expansion in their supply of credit to all firms: crowding-out gives way to crowding-in. These predictions are confirmed by empirical evidence from the recent Spanish housing bubble. In the early years of the bubble, non-housing firms reduced their credit from banks that were more exposed to the bubble, and firms that were more exposed to these banks had lower credit and output growth. In its last years, these effects were reversed.

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Bibliographic Reference

Mart�n, A, Moral-Benito, E and Schmitz, T. 2018. 'The Financial Transmission of Housing Booms: Evidence from Spain'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12999