Housing Market Illiquidity and Mortgage Deepening in Moldova: the Role of Subsidized Credit and Transaction Formalization

Abstract

This paper examines the recent divergence in Moldova between falling real estate transaction volumes and continued mortgage lending growth. In standard housing market frameworks, transaction activity and credit tend to move together. However, recent data point to a different pattern: a sharp drop in market turnover alongside a steady increase in mortgage lending and its share of transactions. The paper seeks to explain this development by focusing on the structural and institutional changes. Rather than indicating a breakdown of conventional housing dynamics, the pattern points to a shift in who can participate in the market and how transactions are financed. Three main factors appear to be driving this change. First, rising housing prices have made it increasingly difficult for households to rely on their own funds. Second, government-supported mortgage programs have expanded access to credit for certain groups of borrowers. Third, the gradual formalization of transactions, particularly through tighter restrictions on cash payments, has raised the barriers to entry for buyers who depend on informal or non-documented sources of funds. Using descriptive evidence, the analysis shows that declining market activity reflects reduced participation rather than falling underlying demand. Mortgage lending continues to expand within a smaller pool of credit-eligible buyers, leading to a higher observed mortgage share. These data indicate that mortgage growth should not be read in isolation as a sign of a strong housing market. More broadly, the Moldovan case highlights how affordability constraints, credit policies, and increasing financial formalization can reshape housing market outcomes in emerging and transition economies. UDC: 332.72+[332.834:336.77](478); JEL: O18, R30, R38