The Effect of Credit Supply on House Prices: Evidence From Turkey

ABSTRACT

This article examines the effect of exogeneous credit supply shocks on house prices in an emerging economy, Turkey, using bank deposits, the number of branches, and financial literacy as instruments to estimate exogenous credit supply. Utilizing data for 26 regions and from 2010 to 2017, I find that an exogenous expansion in housing credits as well as consumer credits utilized has a large and significant effect on prices. A similar effect holds for quality-adjusted hedonic house prices. The results have important policy implications for credit-driven emerging economies.

KEYWORDS:

• housing credits
• house prices
• consumer credits
• instrumental variable (IV) estimation

Acknowledgment

I would like to thank the anonymous referees for their helpful comments. I extend my thanks to Suat Aydin, Mehmet Ali Bayram, Mehmet Caggan, and Feyyaz Catak for their encouragement, discussions, and comments. The views expressed here are those of the authors and do not necessarily represent the views of the Central Bank of the Republic of Turkey.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1. Because of the lack of a house price index in Turkey, Kilinc and Tunc (2013) show that a housing investment deflator generated from gross domectic product could be a good proxy to examine the long-run behavior of house prices.

2. The attractiveness of the real estate sector has led some prominent businessmen in Turkey to enter the sector (see Guven, 2014).

3. For a comprehensive review on housing and macroeconomics, see Piazzesi and Schneider (2016).

4. Another method of home purchases is that constructors/developers provide their own payment schemes via bill obligatory to purchasers. This method of home purchase financing is common, especially for high-segment houses on the market and in particular during relatively tight credit conditions. According to the March 2019 report of the Association of Real Estate and Real Estate Investment Companies, about half of the top-segment sales are conducted via the bill obligatory mechanism (GYODER, 2019).

5. The correlation between real housing loans and housing interest rates for the 2010–2018 period is − 0.45.

6. Since Turkstat will deliver the regional GDP data for 2018 in December 2019, I restrict the data to 2017 even though house price and credit data are available for 2018.

7. Although some may argue that housing sector is a tradable sector, as foreigners can purchase, the share of foreign purchasers is negligibly low.

Additional information

Notes on contributors

Cengiz Tunc

Cengiz Tunc is an economist at the Central Bank of the Republic of Turkey. He also worked at Toros University, Mersin, Turkey, during the 2017–2018 academic year, as an assistant professor of economics. He holds a PhD in economics from the North Carolina State University. His research areas cover housing economics, portfolio allocation, monetary economics, and international trade.