House prices and household debt in the euro area

Several European countries have witnessed lasting deleveraging of private sector, while debt to income ratio of households remained steady or even increased. We build upon the evidence of Goodhart and Hofmann (2007) that household indebtedness is directly linked to house prices developments. Since this link is due to heterogeneous country dynamics in the euro area becoming more country specific, we explore this relationship in the panel data setting for the euro area countries. We confirm that there is a statistically significant relationship between the credit and house prices in the long run; however we fail to confirm it over the period past the financial crisis. In the article, we explore and discuss possible reasons behind this changing regularity.