Taming Credit Market Liberalization? Corporatist Wage Setting Institutions’ Mitigating Effects on Housing Bubbles

Many analyses in international political economy (IPE) identify interest rate convergence, magnified in the process of European monetary integration, and financial market liberalization as causal factors behind the rise of housing bubbles in Europe.  Despite this common credit supply shock, however, European economies experienced very heterogeneous trends in housing inflation throughout the 1990s and 2000; some countries (Ireland and Spain) witnessed significant housing bubbles while others witnessed stagnation in housing prices (Germany and Austria).  Turning towards demand determinants of housing prices, we focus on how coordinated wage setting institutions may blunt financial liberalization’s impact on housing inflation via their restraining effect on incomes.  Employing both instrumental variable regression for a panel of 17 OECD countries, and a structured case comparison of housing developments in Ireland and the Netherlands, we uncover two findings: income growth is a more important predictor of changes in housing prices than domestic credit expansion, reductions in real interest rates, and capital account liberalization, and; countries with coordinated wage setting institutions that either grant export sector or the state agenda setting and veto powers over wage developments in non-tradable sectors, ceteris paribus, realize more restrained income growth and, in turn, are less prone to housing bubbles.