Credit Crunch: The Role of Household Lending Capacity in the Dutch Housing Boom and Bust 1995-2018

Abstract: What causes house prices to rise and fall? Economists identify household access to credit as a crucial factor. "Loan-to-Value" and "Debt-to-GDP" ratios are the standard measures for credit access. However, these measures fail to explain the depth of the Dutch housing bust after the 2009 Financial Crisis. This work is the first to model household lending capacity based on the formulas that Dutch banks use in the mortgage application process. We compare the ability of regression models to forecast housing prices when different measures of credit access are utilised. We show that our measure of household lending capacity is a forward-looking, highly predictive variable that outperforms `Loan-to-Value' and debt ratios in forecasting the Dutch crisis. Sharp declines in lending capacity foreshadow the market deceleration.