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Housing and credit misalignments in a two-market disequilibrium framework

Jaunius Karmelavičius, Ieva Mikaliunaite () and Austėja Petrokaitė Petrokaitė

No 135, ESRB Working Paper Series from European Systemic Risk Board

Abstract: During the COVID-19 pandemic, house prices and mortgage credit rose at a long unseen pace. It is unclear, however, whether such increases are 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 o f t he two-market disequilibrium model specifications f or Lithuanian monthly data. U sing 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 g aps. We find that, by mid-2021, Lithuania was experiencing a heating-up 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. JEL Classification: C34, D50, E44, E51, G21

Keywords: disequilibrium; early warning indicators.; fundamentals; house prices; misalignments; mortgage credit (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban and nep-ure
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