Lending behavior and real estate prices

Christian Hott

Journal of Banking & Finance, 2011, vol. 35, issue 9, 2429-2442

Abstract: The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of borrowers. Besides other factors, this creditworthiness depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the supply of mortgages. I develop a theoretical model which explains this circular relationship. I show how different kinds of expectation formations can lead to fluctuations in 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; Lending; behavior (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (33)

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