Bank Lending and Property Prices: Some International Evidence*

Over the last two decades, bank lending has been closely correlated with property prices in both industrialised and developing countries. From previous empirical studies it is not clear whether these cycles were driven by property prices or lending. In this study I analyse the direction of causality between bank lending and property prices in 16 industrialised countries over the last two decades. Longrun causality appears to go from property prices to bank lending. This finding suggests that property price cycles, reflecting changing beliefs about future economic prospects, drive credit cycles, rather than excessive bank lending being the cause of property price bubbles. The results of estimating error-correction equations for credit growth and the change in property prices suggest that there is evidence of short-run causality going in both directions. This implies that a mutually re-enforcing element in past boom bust cycles in credit and property markets cannot be ruled out. This paper was written while the author was a Visiting Research Fellow at the Hong Kong Institute for Monetary Research at the Hong Kong Monetay Authority. I am grateful to Claudio Borio, Stefan Gerlach, Olan Henry, Charles Goodhart, Philip Lowe, Jürgen von Hagen and seminar participants at the Bank for International Settlements for helpful comments and Steve Arthur for his help with the data. All remaining errors are my own responsibility.