Keywords

housing loan subsidy, price capitalization, hedonic regressions, evaluation

In this paper, we explore whether a program of housing loan subsidies introduced in Croatia contributed to housing price increases. The subsidy was designed to cover a portion of annuities in the initial period of the housing loan repayment, with a distinct feature that a household could apply for the subsidy only during a monthlong period. Using a dataset on housing transactions we document that the subsidy disrupted the usual intra-annual dynamics of residential transactions as they became very concentrated in the month when housing loan subsidy applications ended. Using an event study approach we find that the housing prices increased just around the introduction of the subsidy. In order to discuss possible confounders, we exploit the subsidy built-in implementation rules, discuss the role of the international housing cycle, and explore the interplay of the housing market and tourism in Croatia. We conclude that the housing loan subsidy acted as a procyclical policy that contributed to the already increasing trend of housing prices. Finally, exploiting the regional variation in the subsidy intensity, we conclude that housing price capitalization was driven by prices in areas and regions with already active housing markets.