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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.

Suggested Citation

  • Christian Hott, 2009. "Banks and Real Estate Prices," Working Papers 2009-08, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2009-08
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2009/working_paper_2009_08
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit Cycle; Real Estate Prices; Bubbles;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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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