Easy availability of bank credit has been blamed the major cause of financial crises from Asia to the Latin America. IMF (2000) and BIS (2001) have documented The synchronization of credit and property price cycles The consequences of undisciplined credit extension financing a runaway property Market can be disastrous and long lasting.Thailand, from where the 1997 Asian Financial Crisis has been largely seen as the source of; saw the collapse of banks and a huge overhang Of completed and incomplete properties that persisted for years after the crisis ended. The Relation between credit availability and the property market is, therefore, an issue of concern to policy makers at national and international levels.
The effects of bank credit availability are many. Given the consistency in the results obtained, the basic model of property price level Determination is quite straightforward. For the Singapore property market, Cuerro (1996) and Ng (1998) have found that affordability proxied by the per capital GDP and/or the national Wage level and the mortgage interest rate are significant factors.
First, bank credit displaces the mortgage rate as a one-lag determinant of the composite price index level. This suggests the effect of bank credit availability has not been masked by mortgage rate.
Second, the separate modeling of private and public property price indexes shows clearly that bank credit affects the former appreciably more than the latter. Aggregate lagged impact on private property price is more than three times that on public property price. A Cholesky decomposition shows that the property price response to bank credit is comparatively short.