'Credit Supply and the Housing Boom'

Alejandro Justiniano, Giorgio Primiceri, and Andrea Tambalotti at Vox EU:

Credit supply and the housing boom: ... Conclusion In this column, we argued that any reconstruction of the fundamental causes of the housing and credit boom that preceded the Great Recession must be consistent with four stylised facts: house prices and debt surged, the ratio of debt to house values was roughly constant, and real mortgage rates fell. From the perspective of these four facts, explanations that rely exclusively on an increase in credit demand associated with more generous credit conditions—for instance in the form of higher loan-to-value ratios—are lacking. On the contrary, a shift in credit supply associated with the emergence of securitisation and shadow banking, is qualitatively and quantitatively consistent with the four facts.

This interpretation of the macroeconomic facts has the additional merit of being consistent with the micro-econometric evidence of Mian and Sufi (2009 and 2010). They show that an expansion in credit supply was the fundamental driver of the surge in household debt, and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.

Shifting the focus of the inquiry into the causes of the boom from credit demand to credit supply has potentially important implications for the study of macro-prudential policy, since much of the literature on this topic has tended to model the boom as stemming from looser borrowing constraints. Exploring the normative implications of the alternative view proposed in this article is an exciting avenue for future research.