A New Policy Paradigm
- KDI series in Economic Policy and Development
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 5: Housing price and mortgage credit cycles: tales of two countries
It is a historical fact that real estate boom-bust and cyclical bank lending are endogenously inter-connected. For example, the commercial real estate cycle in the U.S. in the 1980s was amplified by the lax underwriting in construction and development loans by lending institutions, in particular, by the Savings & Loan institutions, which is often termed an "unholy alliance" between lenders and developers (Litan 1992). More recently, Crowe et al. (2011) document that 35 out of 51 (almost 70 percent) housing price boom-bust episodes observed in 40 countries in recent decades were followed by a banking crisis; and two thirds of 46 "systemic" banking crises, i.e., those events that are disruptive not only to financial systems but to the economy as a whole, were preceded by the boom-bust patterns of housing prices. By contrast, only about 15 percent of stock market boom-busts preceded systemic banking crises, virtually all of which coincide with a real estate boom-bust. With that as a backdrop, the last home price boom-bust in the U.S. (1997-current) is record-setting: the price cycle exhibits the highest total price growth rate (87% in real term), the deepest downturn (minus 35% so far), and the longest duration (14 years) in the country's recent history.
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