The Real Estate and Credit Bubble: Evidence from Spain

Josep M. Raya, Ozlem Akin, José-Luis Peydró, Jaume Garcia-Villar and José García-Montalvo
Authors registered in the RePEc Author Service: Jose-Luis Peydro and Jaume Garcia Villar

No 772, Working Papers from Barcelona School of Economics

Abstract: We analyze the determinants of real estate and credit bubbles using a unique borrower-lender matched dataset on mortgage loans in Spain. The dataset contain real estate credit and price conditions (loan principal and spread, and the appraisal and market price) at the mortgage level, matched with borrower characteristics (such as income, labor status and contract) and the lender identity, over the last credit boom and bust. We find that lending standards are softer in the boom than in the bust. Moreover, despite some adjustment in lending conditions in the good times depending on borrower risk, the results suggest too soft lending standards and excessive risk-taking in the boom. For example, mortgage spreads for non-employed are identical to employed borrowers during the boom. Banks with worse corporate governance problems soften even more the standards. Finally, we analyze the mechanism by which banks could increase the supply of mortgage loans despite of regulatory restrictions on LTVs. The evidence is consistent with banks encouraging real estate appraisal firms to introduce an upward bias in appraisal prices (29%), to meet loan-to-value regulatory thresholds (40% of mortgages are just bunched on these limits), thus building-up the credit and the real estate bubble.

Keywords: moral hazard; financial crises; conflicts of interest; lending standards; credit supply; excessive risk-taking; bank incentives; prudential policy; real estate bubble (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-ban, nep-cta, nep-eec and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Related works:
Journal Article: The real estate and credit bubble: evidence from Spain (2014)
Working Paper: The real estate and credit bubble: Evidence from Spain (2014)
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