The impact of financial development on house prices

We examine the relationship between financial development and house prices in the Group of Seven (G7) countries over the period 1870–2016. We use parametric panel data models that incorporated interactive fixed effects and non‐parametric models that allow us to examine non‐linearities and the time‐varying nature of the relationship. Our parametric estimates show a positive relationship between financial development and house prices. The results from our non‐parametric model not only reinforce this finding but also shows evidence of a negative effect of financial development prior to the mid‐twentieth century, suggesting a time‐varying non‐linear impact. We find that inequality and mortgage loans are mechanisms through which financial development transmits to house prices. Financial crisis moderates the relationship between financial development and house prices, although this works only through sovereign defaults. Our findings are robust to a suite of robustness and sensitivity checks.