Bank lending effect on German commercial property prices

Abstract

This paper analyzes the effects of bank lending on German commercial property prices. The theory on the role of financial intermediaries in business cycle activity states that lending activity is characterized by asymmetric information between borrowers and lenders. As a consequence, interest rates may not move to clear lending markets (as in models with moral hazard and adverse selection elements) or firms' net worth may play a critical role as collateral in influencing lending activity (as in models with agency costs). While the theory is concrete, the debate on the empirical support for these models continues. In this paper, our goal is to continue in exploring this debate by estimating a recursive VAR model using German (both aggregate and regional level) commercial property data from 1975 to 2004. Unlike other previous empirical results in commercial real estate literature, our main results show a weak negative correlation between growth in property prices and growth in credit, especially at the regional level.