Credit Supply and the Spanish Housing Boom and Bust

Abstract

Shocks to the supply of mortgage credit explain 50 to 90 percentage points of the increase in Spanish home prices from 1995 to 2008 and all of the decline from 2008 to 2015, which is the entire cyclical fluctuation in the Spanish national aggregate price-to-income and price-to-rent ratios. To identify credit supply, I use several instruments that reflect pre-boom regional heterogeneity in access to credit across Spanish provinces or sharp province-level structural breaks during the boom. Provinces exposed to plausibly exogenous relative expansions in credit supply experienced relative increases in mortgage lending and home prices during the boom and relative decreases in both during the bust that were consistent with an elasticity of home prices with respect to mortgage lending between 0.1 and 0.2. I also find large effects of credit-supply shocks on bank deposits, bankruptcies, and several measures of construction activity, with smaller effects on aggregate output and employment. JEL Codes: E44, E51, G21, L85, O52, R31 Key Words: Mortgage Lending, Credit Supply, Home Prices