Monetary Policy and Real Estate Price Distortions: How Bank Lending Amplifies Housing Market Imbalances

Vera Baye () and Valeriya Dinger
Additional contact information
Vera Baye: University of Osnabrueck

No 126, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: We empirically document deviations of residential real estate prices from fundamental values at the micro level and investigate their relationship with local bank lending growth during a period of unconventional monetary policy. Our findings indicate a positive relationship between credit growth and excessive price increases in real estate markets, with interest rate reductions further amplifying these credit-driven price distortions. Additionally, we provide evidence that banks' search-for-yield behavior explains the increase in lending, particularly among deposit-funded banks that experienced a squeeze of margins during the negative monetary policy rate period. This credit expansion, in turn, directly influences the real economy by fueling local housing markets. In our analysis, we exploit that the introduction of negative monetary policy rates affected banks differently depending on their ex-ante liquidity and relate micro-level real estate data to balance sheet information from locally operating banks and macroeconomic variables.

Keywords: residential real estate prices; housing bubbles; bank lending; search-for-yield; micro data; negative interest rates (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 R21 R31 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2025-05-08
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://web.fb9.uni-osnabrueck.de/repec/iee/wpaper/17470437_WP_126.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iee:wpaper:wp0126

Access Statistics for this paper

More papers in IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University Rolandstrasse 8, 49069 Osnabrueck. Contact information at EDIRC.
Bibliographic data for series maintained by Karin Wessler-Rensmann ().