Discussion paper

DP12999 The Financial Transmission of Housing Booms: Evidence from Spain

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.


Martín, A, E Moral-Benito and T Schmitz (2019), ‘DP12999 The Financial Transmission of Housing Booms: Evidence from Spain‘, CEPR Discussion Paper No. 12999. CEPR Press, Paris & London. https://cepr.org/publications/dp12999