The Global Financial Crisis and Housing

The Global Financial Crisis and Housing

A New Policy Paradigm

KDI series in Economic Policy and Development

Edited by Susan Wachter, Man Cho and Moon Joong Tcha

This innovative book analyses the role played by real estate markets in global financial stability and examines the fragile link between the two. Through what transmission channels do housing market cycles influence broader economic systems? How has the Global Financial Crisis shifted our view and understanding of these linkages? This detailed book answers these questions in an international comparative perspective. Specific topics covered include macroeconomic transmission channels of the housing cycle, the role of housing in the finance system, construction financing as a cycle amplifier, and various related public policy issues such as the policy remedies needed to deal with housing and mortgage-driven crises.

Chapter 2: Macroeconomics of housing

Matteo Iacoviello

Subjects: economics and finance, asian economics, financial economics and regulation, international economics


The global recession of 2008 and 2009 has served as a dramatic reminder to economists, policymakers and ordinary citizens of the importance of developments in the housing market for the broader economy. While cause and effect are difficult to establish, it is obvious that what has happened in the housing sector has mattered for the health of the financial sector, of businesses and consumers alike. The assets of many financial institutions have suffered precipitous declines in value when concerns about the quality of their mortgage portfolios have become widespread. Small businesses that depended on the weakened financial sector (for their financing) or on the weakened housing sector have sharply contracted during the recession. Consumers whose houses have dropped in value have experienced massive declines in their net worth. For macroeconomists, one of the unintended consequences of the recession has been that research on the housing market and the macroeconomy has finally become mainstream. And it has become mainstream, I believe, because economists have understood that the importance of housing for the broader economy reaches beyond the small share of housing in aggregate Gross Domestic Product (GDP). Only ten years ago "housing" was not part of mainstream economic research, and was confined to a subfield of economics named "real estate economics." Today, things have changed.

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