The purpose of this study is to investigate the Granger causal link between bank lending and housing prices.
Several econometric methods, including Granger causality tests based on a vector error correction model, were applied to analyse monthly time series data in the Swedish context. The data cover bank lending, apartment prices, villa prices, mortgage rates and the consumer price index from September 2005 to October 2013.
The results indicate that bank lending and housing prices are cointegrated. According to Granger causality tests, bidirectional relationships exist between bank lending and each of apartment and villa prices, confirming the financial accelerator mechanism. However, earlier shocks arising from housing prices themselves account for the greatest variation in future prices.
To the authors’ knowledge, this study represents the first analysis of the causal link between bank lending and the housing market in terms of apartment and villa prices in the Swedish context.
