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Bank lending and commercial property cycles: some cross-country evidence

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  • E. Philip Davis

    (Brunel University)

  • Haibin Zhu

Abstract

Motivated by the frequently observed link between commercial property price volatility and banking crises, this paper investigates at a macroeconomic level the determination of commercial property prices and the interaction between commercial property prices and bank lending. We develop a reduced-form theoretical model which suggests bank lending is closely related to commercial property prices and that commercial property can develop cycles given plausible assumptions, where the cycles are largely driven by the dynamic linkage between the commercial property sector, bank credit and the macroeconomy. Cross-country empirical analysis based on a sample of 17 developed economies, using a unique dataset collected by the BIS, confirms the model's predictions. An investigation of determinants of commercial property prices shows particularly strong links of credit to commercial property in the countries that experienced banking crises linked to property losses in 1985-95. Further studies of dynamic interaction suggest that commercial property prices are rather "autonomous", in that they tend to cause credit expansion, rather than excessive bank lending boosting property prices. In addition, GDP has an important influence on both commercial property prices and bank credit. The work has implications for risk management and prudential supervision.

Suggested Citation

  • E. Philip Davis & Haibin Zhu, 2004. "Bank lending and commercial property cycles: some cross-country evidence," BIS Working Papers 150, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:150
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    References listed on IDEAS

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    More about this item

    Keywords

    commercial property prices; bank credit; time series analysis;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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