Systemic risk from real estate and macro-prudential regulation

Franklin Allen and Elena Carletti ()

International Journal of Banking, Accounting and Finance, 2013, vol. 5, issue 1/2, 28-48

Abstract: There is considerable evidence that boom and bust cycles in real estate are the primary cause of financial crises. This paper develops a model of real estate pricing based on rational behaviour with two regimes. In 'normal times' prices of housing units are determined by the consumers who live in them and are equal to the discounted stream of housing services. In 'boom and bust times' speculators find it profitable to borrow from banks and enter the market. There is an agency problem because banks are unable to fully assess the risk that the speculators are taking and this leads to risk shifting and asset substitution. The result is a bubble in real estate prices in that they are higher than the discounted stream of housing services during the boom phase. This model is then used as the basis for analysing macro-prudential polices designed to prevent the occurrence of such bubbles. These measures include monetary policy, fiscal tools such as real estate transfer taxes, and annual real estate taxes and banking regulation such as restrictions on loan-to-value ratios, countercyclical capital requirements and loan provisions.

Keywords: boom-bust cycles; agency problem; price bubbles; loan restrictions; transfer taxes; systemic risk; real estate taxes; banking regulation; loan-to-value ratios; countercyclical capital requirements; loan provisions; macro-prudential policies; financial crisis; risk assessment; housing bubbles; real estate bubbles. (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.inderscience.com/link.php?id=58091 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ids:injbaf:v:5:y:2013:i:1/2:p:28-48

Access Statistics for this article

More articles in International Journal of Banking, Accounting and Finance from Inderscience Enterprises Ltd
Bibliographic data for series maintained by Sarah Parker ().