Housing and credit misalignments in a two-market disequilibrium framework

Jaunius Karmelavičius, Ieva Mikaliunaite-Jouvanceau and Austėja Petrokaitė
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Jaunius Karmelavičius: Bank of Lithuania
Austėja Petrokaitė: Bank of Lithuania

No 42, Bank of Lithuania Occasional Paper Series from Bank of Lithuania

Abstract: During the Covid-19 pandemic, house prices and mortgage credit are growing at a long-unseen pace. However, it is unclear, whether such growth is warranted by the underlying market and macroeconomic fundamentals. This paper offers a new structural two-market disequilibrium model that can be estimated using full-information methods, and applied to analyse housing and credit dynamics. Dealing with econometric specification uncertainty, we estimate a large ensemble of the two-market disequilibrium model specifications for Lithuanian monthly data. Using the model estimates, we identify the historical drivers of Lithuania’s housing and credit demand and supply, as well as price and market quantity variables. The paper provides a novel approach in the financial stability literature to jointly measure house price overvaluation and mortgage credit flow gaps. We find that by mid-2021 Lithuania was experiencing a heating in housing and mortgage credit markets, with home prices overvalued by around 16% and the volume of mortgage credit flow being 20% above its fundamentals.

Keywords: disequilibrium; fundamentals; misalignments; house prices; mortgage credit; early warning indicators (search for similar items in EconPapers)
JEL-codes: C34 D50 E44 E51 G21 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2022-04-12
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
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Working Paper: Housing and credit misalignments in a two-market disequilibrium framework (2022)
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