Stock and real estate prices in Greece: wealth versus ‘credit-price’ effect

Abstract

An attempt is made to clarify the relationship between price fluctuations of two major assets in Greece, real estate and stocks. Two mechanisms have been proposed to interpret this relationship. The first one is well known as ‘wealth effect’, which claims that households with unanticipated gains in share prices tend to increase the amount of housing. The second one is the credit price effect, which claims that a rise in real estate prices can stimulate economic activity, future profitability of firms and, as a consequence, stock market prices by raising the value of collateral and reducing the cost of borrowing for both firms and households. To test the above transmission, channel tests of Granger causality are employed. Empirical findings are in favour of the wealth effect hypothesis for Athens real estate prices but not for other urban real estate prices. Since real estate at the Athens Metropolitan area could be considered as an investment vehicle, it is reasonable to argue that higher stock prices increase the share of households’ portfolios in the stock market and cause a rebalancing of their portfolios by selling stocks and purchasing other assets like houses.

Notes

Since commercial and residential property serves as collateral for loans, the credit-constrained firm will be able to borrow more for investment.

It is understood that the Granger Causality is a simple test and does not prove the existence of a wealth effect. Nevertheless, the test is empirically consistent with this effect.