Role of real estate in financial instability: French evidence

This paper evaluates the place of residential real estate in the stability of the French financial system. By employing three-stage least-squares (3SLS), we analysed the dynamic interaction between the real estate credit market and the evolution of real estate prices. This interaction creates a destabilising spiral that expounds the housing bubble's formation. In France, as in most developed countries, the increase in real estate credits was accompanied by an increase in property prices. Our estimate shows that an increase in home credit increases home prices and vice versa. Therefore, we conclude that there is a relationship of interaction between the two markets leading to a destabilising spiral. The study has important implications for policymakers and investors. The use of macroprudential policy is justified by the ineffectiveness of micro-prudential policy and monetary policy alone in ensuring the stability of the financial system. Monetary policy, via the interest rate, could not prevent the development and subsequent outbreak of the 2007 financial crisis. Existing studies are limited in exploring the interaction between the growth rate of real estate prices and the number of loans to housing in the French context. This study adds value to existing literature and confirms this interaction.