Banks have been boosting mortgage lending for decades. But do they do so at the expense of corporate loans? A new Bank of England Staff Working Paper by Lu Zhang (SFL), Arzu Uluc (BoE) and Dirk Bezemer (SFL) shows that they did.

Using a unique quasi-experimental setting and a rich, tailor-made micro-level data set on bank lending volumes, bank balance sheets and mortgage loan characteristics of UK banks, this paper shows that banks with larger shares of residential mortgages in total loans prior to the global financial crisis reduced their lending to business more afterwards. Post-crisis corporate lending is also sensitive to the riskiness of banks’ mortgage portfolios. Banks having more mortgages to borrowers with impaired credit history, or more mortgages to the self-employed, or mortgages with higher loan to value ratios prior to the crisis reduced their lending to non-financial businesses more.

The conclusion is that residential property markets have far-reaching effects on macroeconomic outcomes, beyond household and firm behaviour.