House prices and credit cycles: the case of Cyprus
| Date | 27 April 2020 |
| Pages | 539-550 |
| DOI | https://doi.org/10.1108/JPIF-02-2020-0022 |
| Published date | 27 April 2020 |
| Author | Dario Pontiggia,Petros Stavrou Sivitanides |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
House prices and credit cycles:
the case of Cyprus
Dario Pontiggia
Department of Economics and Business, Neapolis University, Paphos, Cyprus, and
Petros Stavrou Sivitanides
Department of Real Estate, Neapolis University, Paphos, Cyprus
Abstract
Purpose –The purpose of this paper is to assess whether the rapid accumulation of bank depositsbefore the
global financial crisis and their subsequent drastic reduction was the main driving force of the Cyprus house
price cycle over the period 2006–2015.
Design/methodology/approach –To this aim we estimate a three-equationmodel in which house prices are
determined by housing loans, among other factors, and housing loans are determined by bank deposits. All
equations are estimated using partial adjustment model specifications.
Findings –Our findings indicate that housing loans, which capture the effect of credit availability on housing
demand, had the smallest effect on house prices, thus providing little support to our proposition of a deposits-
driven cycle in house prices.
Research limitations/implications –The main limitation of the study is the use of the housing loan stock
instead of the actual volume of housing loans in each period due to lack of such data. As a result our
econometric estimates may not accurately capture the magnitude of the effect of housing loans on house prices.
Practical implications –The study has important practical implications for policy makers as it highlights
the importance of availability of credit in supporting effective demand for housing during periods of economic
growth. Furthermore, it highlights the key role of house price increases in combination with the collateral effect
in driving the house price cycle.
Originality/value –This is among the few studies internationallyand the first study in Cyprus that attempts
to link econometrically the credit and house price cycles that were caused by the global financial crisis.
Keywords House prices, House price determinants,Credit cycle, Deposits and house prices, House price cycle,
House prices and credit cycles
Paper type Research paper
1. Introduction
The housing market is a very important component of national economies developed
countries, as it is a large part of their property markets. Housing prices have a significant
effect on household wealth and consumption, especially in countries with high
homeownership rate like Cyprus. Furthermore, fluctuations in housing prices have a
significant effect on the financial system, as a large part of the loan portfolios held by banks
are collateralized with residential property.
Currently, the Cyprus economy is on a stable path of recovery from a deep recession, as
real GDP has been growing at an accelerating rate in the last four years. At the aftermath of
the global financial crisis the Cyprus economy took a very severe hit in 2013 when a bail in
financed by the depositors of the country’s largest banks was implemented as a prerequisite
imposed by component for providing the Cyprus government with funds that would prevent
it from going bankrupt. Those events were followed by the resolution of the second largest
bank, significant restructuring of the largest bank, several reforms in the public sector and
significant contraction of economic and property market activity. As a result of these
developments, there was significant reduction in bank deposits and credit, as well as a
dramatic increase in the number of non-performing loans. Although there has been a
significant reduction of non-performing loans in the last four years, a non-negligible amount
is still burdening the country’s banking system.
House prices
and credit
cycles
539
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 23 February 2020
Revised 3 March 2020
Accepted 3 March 2020
Journal of Property Investment &
Finance
Vol. 38 No. 6, 2020
pp. 539-550
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2020-0022
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