Residential mortgages, the real estate market, and economic growth: evidence from Europe

Date03 September 2018
Publication Date03 September 2018
AuthorUmberto Filotto,Claudio Giannotti,Gianluca Mattarocci,Xenia Scimone
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Residential mortgages, the real
estate market, and economic
growth: evidence from Europe
Umberto Filotto
Department of Management and Law,
Universita degli Studi di Roma Tor Vergata, Rome, Italy
Claudio Giannotti
University LUMSA, Rome, Italy, and
Gianluca Mattarocci and Xenia Scimone
Department of Management and Law,
Universita degli Studi di Roma Tor Vergata, Rome, Italy
Purpose The purpose of this paper is to evaluate the impact of macroeconomic condition and real estate
price trend on the amount of residential loan.
Design/methodology/approach The paper using a sample of 16 European Countries for the time period
20072015 evaluates the impact of change in the gross domestic product (GDP) growth and the inflation rate
on the amount of residential loans. The analysis is performed by using a vector autoregressive (VAR) and
generalized VAR approach for the full sample and for each country considered.
Findings For a short-term horizon, shocks to mortgages, the house price index (HPI) and the GDP have a
positive effect on the GDP, a shock to the amount of mortgages has a positive effect on the mortgage supply
and a shock to the GDP has a negative effect on HPI. The main results for the long-term horizon are that a
GDP shock has a positive and persistent effect on the amount of mortgages, a shock to HPI has a negative and
persistent effect on mortgages and a shock to the amount of mortgages seems to have no persistent effect on
the GDP or the HPI. Moreover, the analysis shows that a spillover risk among countries exists and a GDP
shock in a European area has an effect on the GDP, real estate prices and residential mortgages in almost all
European countries.
Practical implications Results obtained show that both macroeconomic and housing prices shocks
matter for the real estate lending and the effect are different in the short- and in the mediumlong-term
horizon. Results are also different country by country and they are affected by the level of financial
development of the country.
Originality/value The paper studies a lending crisis period and evalua tes for the European market the
impact of shock on macro -variables for mortga ges focusing the atten tion for the first time on ly on
residential mortgage s.
Keywords Housing, Mortgages, Real estate, European markets, Residential real estate, Macroeconomy growth
Paper type Research paper
1. Introduction
Homeownershipis greatly influenced bya countrys culture. In Sou thern Europe, for example,
homeownershipis an important achievement for a family,unlike in Germany, where the share
of people owning or renting a house is more or less the same (Hypostat, 2016). Moreover,
requests for residential mortgage financing to purchase propertyare quite common in Europe
and, on average, 25 percent of families have a mortgage (Cerutti et al., 2017), but the
percentage varies country by country. Northern countries, such as Sweden, the Netherlands
and Denmark, show above-average usage of lending, with more than half of the population
holding mortgages. At the height of the real estate market cycle in 2008, the residential
mortgage market represented almost 50 percent of the gross domestic product (GDP) for
Europe, but with the bursting of the housing bubble and the related increase in bank capital
requirements, the supply of mortgage loans significantly decreased (Case et al., 2000).
Journal of Property Investment &
Vol. 36 No. 6, 2018
pp. 552-577
© Emerald PublishingLimited
DOI 10.1108/JPIF-09-2017-0060
Received 11 September 2017
Revised 9 April 2018
Accepted 18 July 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
The literature on the interaction between the housing market and the economy shows
that the housing market can assume a double role, as a consumption good and as an
investment (Leung, 2004). In both cases, macroeconomic trends can affect housing prices: if
the house is a familys essential living asset, when house prices rise faster than household
income, families require more funding to cover the costs related to real estate investment,
whereas, if the house is used as an investment, the greater the wealth available for the
individual, the greater the real estate price growth for income-producing assets. The effect of
GDP growth on real estate prices is mainly relevant in the mediumlong term but
macroeconomic trends cannot explain more than the 10 percent of the total variability of
housing prices (Tsatsaronis and Zhu, 2004).
Another important factor that influences residential mortgages is house price growth.
In Europe, the growth in house prices has been particularly noticeable in countries
such as Spain, the UK and Ireland, where house prices have increased by more than
180 percent between 1997 and 2007. Mortgage financing has also been the focus of the
debate in Europe, although the actual dynamics of the relation between mortgage
credit and house prices are not, so far, well known (Carbo-Valverde and
Rodriguez-Fernandez, 2010).
This paper focuses on the European market to evaluate whether the house price index
(HPI) and GDP are macroeconomic variables that influence the performance of residential
mortgages outstanding (RMI) and whether the causality goes in the opposite direction.
Residential mortgages are expected to influence housing prices because housing prices,
mortgages and the GDP are related to each other, but the magnitude and type of linkage can
change based on each countrys specific features. Moreover, local trends at the regional or
sub-regional level can affect the housing sector, the credit market and the overall economy
in every national market. This papers main contribution is a combined analysis of the
interaction of mortgages, the GDP and housing prices at the national and international
levels that allows a comparison among countries of spillover risks in the lending market,
real estate prices and the real economy.
The paper is organized as follows: Section 2 briefly reviews the literature on the linkage
between RMI, house prices and the GDP, Section 3 describes the empirical analysis and
Section 4 concludes by summarizing the results and policy implications.
2. Literature review
The literature on the residential real estate market underlines the linkages among the
amount of RMI, the GDP and real estate price dynamics and identifies different drivers that
may affect the linkage among different markets. The section will analyze separately theories
about the linkage between housing prices and economic growth (Section 2.1), mortgages and
housing (Section 2.2) and mortgage and GDP (Section 2.3).
2.1 Housing and economic growth
The real estate industry is one of the key sectors in every economy worldwide (Andrews
et al., 2011) and an increase in housing investments impacts the overall economy because the
sectors value chain involves firms with different specializations that are not only in the real
estate industry (e.g. Wells, 1985). The impact of housing on the GDP is mostly relevant in the
mediumlong term because the types of jobs normally created thorough a real estate
development project are expected to be stable over time and, due to specific asset features,
the investment is not capital intensive because it can be easily financed through the lending
market (Turin, 1980).
The linkage of housing investment and the GDP changes based on the degree of
economic development, following a reverse U-shaped trend: in developing economies, the
The real
estate market

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