MERCURE: Cheap Credit, Unaffordable Houses?

Labonne, C.; Welter-Nicol, C.

MERCURE: Cheap Credit, Unaffordable Houses?

C. Labonne and C. Welter-Nicol

Debats Economiques et financiers from Banque de France

Abstract: We use variations in the Interest Free Loan policy (“IFL” hereafter) in France to assess the causal relationship between credit availability, housing prices and homeownership. The IFL subsidy varies at the municipality level and has been reformed three times between 2009 and 2011. We handle endogeneity between housing prices and policy by sampling municipalities bordering administratively defined policy areas. Using a loan-level dataset, we find IFLs allow a positive housing credit shock, channeled into housing prices. We find a high elasticity of housing prices to housing credit when we instrument the latter variable by the IFL, between 0.4 and 0.7 depending on the estimation strategy. We also test for the effect of credit conditions on homeownership. We approximate credit market selection by the difference between borrowers’ and average income. We find an exogenous – IFL induced – increase in LTV reduces credit selection.

Keywords: Housing Credit; Interest-Free Loan; Real estate prices; Homeownership. (search for similar items in EconPapers)
JEL-codes: G21 R28 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015
New Economics Papers: this item is included in nep-ure
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