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Banks and Real Estate Prices

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  • Christian Hott

Abstract

The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of their borrowers. Beside other factors, the creditworthiness of borrowers depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the willingness of banks to provide funding for real estate purchases. In this paper I develop a theoretical model which describes and explains this circular relationship. Using this model, I show how different kinds of expectation formations can lead to fluctuations of real estate prices. Furthermore, I show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2009-08.

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Length: 42 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:snb:snbwpa:2009-08

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Keywords: Credit Cycle; Real Estate Prices; Bubbles;

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References

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  1. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc.
  3. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
  4. Christian Hott, 2009. "Explaining House Price Fluctuations," Working Papers, Swiss National Bank 2009-05, Swiss National Bank.
  5. Nada Mora, 2008. "The Effect of Bank Credit on Asset Prices: Evidence from the Japanese Real Estate Boom during the 1980s," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(1), pages 57-87, 02.
  6. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series, Center for Financial Studies (CFS) 2007/10, Center for Financial Studies (CFS).
  7. Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1575-1597, September.
  8. Matteo Iacoviello, 2004. "Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis," 2004 Meeting Papers, Society for Economic Dynamics 201, Society for Economic Dynamics.
  9. Christian Hott & Pierre Monnin, 2008. "Fundamental Real Estate Prices: An Empirical Estimation with International Data," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 36(4), pages 427-450, May.
  10. Holly, Sean & Jones, Natasha, 1997. "House prices since the 1940s: Cointegration, demography and asymmetries," Economic Modelling, Elsevier, Elsevier, vol. 14(4), pages 549-565, October.
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