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Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy

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  • John V. Duca
  • Lilit Popoyan
  • Susan M. Wachter

Abstract

From a broad macro-financial structure perspective, overly easy credit conditions gave rise to house price booms and busts in several advanced economies (e.g., Ireland, Spain, and the U.S.), and, more specifically in the U.S., an underpricing of risk made possible by regulatory arbitrage and shadow financing fueled the credit and twin real estate bubbles of the mid-2000s. Across countries and over time bubbles have been particularly acute in real estate markets reflecting not only the relatively inelastic supply of land and thin trading of real estate, but also the amplification of shocks via backward-looking price expectations and the funding of consumption off distorted and elevated prices. The macro-prudential lessons from the Great Crisis highlight the need to prevent the build-up of excess real estate financing and limit the amplification and correlation of real estate risks. And progress has been made in each of these areas through imposing tougher or new restrictions on the choice sets of lenders or of borrowers, with particulars varying across advanced economies. While regulatory reform of banking is going forward, significant challenges remain especially in dealing with correlated risks associated with securitization.

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  • John V. Duca & Lilit Popoyan & Susan M. Wachter, 2016. "Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy," LEM Papers Series 2016/30, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  • Handle: RePEc:ssa:lemwps:2016/30
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    Cited by:

    1. D'Orazio, Paola & Popoyan, Lilit, 2018. "Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?," Ruhr Economic Papers 778, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Atkinson, Tyler & Duca, John V., 2017. "Equity Regulation and U.S. Venture Capital Investment," Working Papers 1707, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    Macro-prudential policy; nancial crises; credit crunches; real estate bubbles; regulatory arbitrage; risk-taking;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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