Banks and Real Estate Prices

Christian Hott

No 2009-08, Working Papers from Swiss National Bank

Abstract: The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of their borrowers. Beside other factors, the creditworthiness of borrowers depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the willingness of banks to provide funding for real estate purchases. In this paper I develop a theoretical model which describes and explains this circular relationship. Using this model, I show how different kinds of expectation formations can lead to fluctuations of real estate prices. Furthermore, I show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns.

Keywords: Credit Cycle; Real Estate Prices; Bubbles (search for similar items in EconPapers)
JEL-codes: E51 G12 G21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2009-08

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