Hidden Drivers of Housing Markets Credit: The Role of the Shadow Economy

Traditional studies of real estate and financing have focused on observable, officially recorded variables such as credit expansion and liquidity conditions. This paper explores, for the first time, the hidden role of the shadow economy by employing a panel dataset of housing prices across 40 countries over the period 1991–2017. We find that expansions in the shadow economy are significantly associated with increases in real house prices and a higher probability of price exuberance episodes, particularly in developing economies. We argue that these effects arise because the shadow economy serves as an unregulated source of liquidity and housing demand that operates outside the formal financial sector. Our findings suggest that financial stability policies targeting real estate markets should explicitly account for the influence of informal economic activity.