Housing Demand and Credit Supply - Evidence from the German Real Estate Transfer Tax
In this paper, we analyse the reaction of German banks to house price fluctuations in the surrounding region at a NUTS-3 level. More specifically, we construct an analytical framework assessing whether banks adjust their mortgage supply in reaction to house price fluctuations in Germany induced by increases in the real estate transfer tax (RETT). This identification strategy helps to cope with the large contemporaneous correlation between credit supply and property prices (see e.g. Gerlach and Peng, 2005). Given the lack of official statistics on house prices at the NUTS-3 level at a higher frequency than the annual level, the first step of this paper comprises the development of a hedonic price index. Based on data provided by Immobilienscout24.de, we construct a hedonic house price index for each German region at a quarterly frequency for the period 2008q1 to 2017q4. We find that a 1 ppt increase in the tax rate leads to a decline in the growth rate of house prices of about 1.2%. The effects of the tax increase are more profound in rural German regions than in urban ones. To investigate the effects of house price growth on mortgage lending supply, we employ an instrumental analysis using the RETT increases as an instrument for house price growth. The estimates suggest that a price decline of 1% reduces mortgage lending of locally operating banks by about 1.4%. Again, this effect is clearly more pronounced in rural regions. Thus, our findings suggest that the transmission of house prices changes to banks' credit supply is mostly based on the characteristics of regional housing markets rather than on the capitalization of banks. This finding may help to understand potential consequences of borrower-based macroprudential instruments, in particularly the loan-to-value (LTV) ratio, as both measures affect the downpayment requirements.