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

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 2007-2015 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 medium-long-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 evaluates for the European market the impact of shock on macro-variables for mortgages focusing the attention for the first time only on residential mortgages.