Cheap Credit, Unaffordable Houses ?

The IFL subsidy varies at the municipality level and has been reformed three times between 2009 and 2011. We handle endogeneity between housing prices and policy by sampling municipalities bordering administratively defined policy areas. Using a loan-level dataset, we find IFLs allow a positive housing credit shock, channeled into housing prices. We find a high elasticity of housing prices to housing credit when we instrument the latter variable by the IFL, between 0.4 and 0.7 depending on the estimation strategy. We also test for the effect of credit conditions on homeownership. We approximate credit market selection by the difference between borrowers’ and average income. We find an exogenous – IFL induced – increase in LTV reduces credit selection.