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The Real Estate and Credit Bubble: Evidence from Spain

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  • Ozlem Akin
  • José García-Montalvo
  • Jaume Garcia-Villar
  • José-Luis Peydró
  • Josep M. Raya

Abstract

We analyze the determinants of real estate and credit bubbles using a unique borrower-lender matched dataset on mortgage loans in Spain. The dataset contain real estate credit and price conditions (loan principal and spread, and the appraisal and market price) at the mortgage level, matched with borrower characteristics (such as income, labor status and contract) and the lender identity, over the last credit boom and bust. We find that lending standards are softer in the boom than in the bust. Moreover, despite some adjustment in lending conditions in the good times depending on borrower risk, the results suggest too soft lending standards and excessive risk-taking in the boom. For example, mortgage spreads for non-employed are identical to employed borrowers during the boom. Banks with worse corporate governance problems soften even more the standards. Finally, we analyze the mechanism by which banks could increase the supply of mortgage loans despite of regulatory restrictions on LTVs. The evidence is consistent with banks encouraging real estate appraisal firms to introduce an upward bias in appraisal prices (29%), to meet loan-to-value regulatory thresholds (40% of mortgages are just bunched on these limits), thus building-up the credit and the real estate bubble.

Suggested Citation

  • Ozlem Akin & José García-Montalvo & Jaume Garcia-Villar & José-Luis Peydró & Josep M. Raya, 2014. "The Real Estate and Credit Bubble: Evidence from Spain," Working Papers 772, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:772
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    References listed on IDEAS

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    1. repec:wsi:serxxx:v:62:y:2017:i:01:n:s0217590817400057 is not listed on IDEAS
    2. repec:bla:germec:v:18:y:2017:i:2:p:133-153 is not listed on IDEAS
    3. José Garcia Montalvo & Josep M. Raya, 2017. "Constraints on LTV as a macroprudential tool: a precautionary tale," Economics Working Papers 1592, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Maas, Daniel & Mayer, Eric & Rüth, Sebastian K., 2018. "Current account dynamics and the housing cycle in Spain," Journal of International Money and Finance, Elsevier, vol. 87(C), pages 22-43.
    5. Rubio, Margarita & Carrasco-Gallego, José A., 2016. "Coordinating macroprudential policies within the Euro area: The case of Spain," Economic Modelling, Elsevier, vol. 59(C), pages 570-582.
    6. Alberto Martín & Enrique Moral-Benito & Tom Schmitz, 2018. "The Financial Transmission of Housing Bubbles: Evidence from Spain," Working Papers 625, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Juan Jimeno & Tano Santos, 2014. "The crisis of the Spanish economy," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 125-141, August.
    8. Bouyon, Sylvain & Musmeci, Roberto, 2016. "Two Dimensions of Combating Over-Indebtedness: Consumer protection and financial stability," ECRI Papers 11930, Centre for European Policy Studies.
    9. Alberto Martin & Enrique Moral-Benito & Tom Schmitz, 2018. "The financial transmission of housing bubbles: evidence from Spain," Economics Working Papers 1613, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Enrique Moral-Benito, 2018. "The microeconomic origins of the Spanish boom," Occasional Papers 1805, Banco de España;Occasional Papers Homepage.
    11. Maas, Daniel & Mayer, Eric & Rüth, Sebastian, 2015. "Current account dynamics and the housing boom and bust cycle in Spain," W.E.P. - Würzburg Economic Papers 94, University of Würzburg, Chair for Monetary Policy and International Economics.
    12. Josep Maria Raya & Aleksander Kucel, 2016. "Did Housing Taxation Contribute to Increase Riskier Borrowing?," The Journal of Real Estate Finance and Economics, Springer, vol. 53(1), pages 90-113, July.
    13. Gabriel Jiménez & Enrique Moral-Benito & Raquel Vegas, 2018. "Bank lending standards over the cycle: the role of firms’ productivity and credit risk," Working Papers 1811, Banco de España;Working Papers Homepage.
    14. repec:eee:finsta:v:33:y:2017:i:c:p:244-260 is not listed on IDEAS
    15. Alberto Martin & Enrique Moral Benito & Tom Schmitz, 2018. "The financial transmission of housing bubbles: evidence from spain," 2018 Meeting Papers 299, Society for Economic Dynamics.
    16. Alberto Martín & Enrique Moral-Benito & Tom Schmitz, 2018. "The financial transmission of housing bubbles: evidence from Spain," Working Papers 1823, Banco de España;Working Papers Homepage.
    17. repec:eee:finsta:v:36:y:2018:i:c:p:39-52 is not listed on IDEAS
    18. José García-Montalvo & Josep M. Raya, 2017. "Constraints on LTV as a Macroprudential Tool: A Precautionary Tale," Working Papers 1008, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    lending standards; credit supply; excessive risk-taking; bank incentives; conflicts of interest; moral hazard; prudential policy; financial crises; real estate bubble;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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