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MERCURE : Cheap Credit, Unaffordable Houses?

Author

Listed:
  • C. Labonne
  • C. Welter-Nicol

Abstract

We use variations in the Interest Free Loan policy (“IFL” hereafter) in France to assess the causal relationship between credit availability, housing prices and homeownership. The IFL subsidy varies at the municipality level and has been reformed three times between 2009 and 2011. We handle endogeneity between housing prices and policy by sampling municipalities bordering administratively defined policy areas. Using a loan-level dataset, we find IFLs allow a positive housing credit shock, channeled into housing prices. We find a high elasticity of housing prices to housing credit when we instrument the latter variable by the IFL, between 0.4 and 0.7 depending on the estimation strategy. We also test for the effect of credit conditions on homeownership. We approximate credit market selection by the difference between borrowers’ and average income. We find an exogenous – IFL induced – increase in LTV reduces credit selection.

Suggested Citation

  • C. Labonne & C. Welter-Nicol, 2015. "MERCURE : Cheap Credit, Unaffordable Houses?," Débats économiques et financiers 20, Banque de France.
    • Handle: RePEc:bfr:decfin:20
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    More about this item

    Keywords

    Housing Credit; Interest-Free Loan; Real estate prices; Homeownership.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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