Housing bubbles and their impact on non-housing investments
Our analysis shows that the credit market plays an important role in transmitting housing bubbles to the rest of the economy. The direction of this transmission mechanism varies over time. Initially, a housing bubble increases credit demand for housing, and therefore crowds out credit and investment from non-housing firms. Eventually, however, the repayment of loans collateralized by the bubble increases banks’ net worth and therefore their credit supply to all sectors. These developments on the credit market have real effects, as the output of non-housing firms tracks the crowding-out and crowding-in effects on credit.
Note: The effect of bank bubble exposure on credit growth of non-housing firms is first negative, then becomes positive, and finally again turns negative after the burst of the bubble.
The financial transmission of housing bubbles: evidence from Spain
Authors: Alberto Martín, Enrique Moral-Benito, Tom Schmitz
From: Universitat Pmpeu Fabra, Banco de España, Bocconi University
Housing liquidity fluctuations and business cycle effects
This paper examines how variations in housing liquidity affect the macroeconomy through portfolio re-adjustments. For this purpose we develop a tractable framework that combines nominal rigidities and incomplete markets in which households choose portfolios of liquid paper and illiquid housing assets. In this model, lower liquidity of housing triggers a flight to liquidity and, thus, puts downwards pressure on interest rates on government bonds. This reduces not only consumption but also investment and hence depresses economic activity.
Housing Market Freezes, Deleveraging, and Aggregate Demand
Author: Christian Bayer, Ralph Luetticke
From: Universität Bonn, University College London
Regional heterogeneity and macroprudential policy
Funke and al. disaggregate both the household sector and the housing stock in a two-region DSGE model with out-of-sync subnational housing markets. They then compare the effectiveness of four macroprudential policies: standard monetary policy by means of a standard Taylor rule, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. Using UK housing data they find that a regionally differentiated macroprudential policy performs best in reducing housing price variance.
Out of Sync Subnational Housing Markets and Macroprudential Policies
Authors: Michael Funke, Petar Mihaylovski, Adrian Wende
From: Hamburg University
