The Role of Loan Supply and Demand Dynamics on Housing Loan Expansion and Housing Prices

This study provides the first investigation of the joint contributions of loan supply and demand shocks, together with housing market shocks, on housing loan expansion and housing prices. A 6-variate structural vector-error correction model is specified with identification of the shocks achieved by a combination of short- and long-run restrictions, and restrictions arising from the presence of cointegration. An important feature of the model is the identification of a full set of shocks across loan, housing, goods and money markets, including the identification of supply and demand shocks in the loan market. Using quarterly Finnish data from 1985 to 2024, the empirical results show that both loan supply and demand shocks can result in significant housing loan expansion over the short- and mid-term, as well as have substantial influence on housing price developments. The findings further indicate that housing price movements are more likely to respond to loan market shocks rather than to cause loan expansion. Implications for Europe through the lens of the Finnish market of the Russian war of aggression in Ukraine are also investigated.