EconPapers    
Economics at your fingertips  
 

Financial stability risks from housing market cycles

Michael Thornley
Additional contact information
Michael Thornley: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

Reserve Bank of New Zealand Bulletin, 2016, vol. 79, 1-16

Abstract: Boom and bust cycles are prevalent features of housing markets in advanced and developing economies around the world. These cycles can present a risk to financial stability. Housing booms often precede financial crises, and the size of a boom, and its subsequent bust, can be amplified by highly leveraged mortgage lending. The financial system can face large ‘direct’ losses on mortgage loans in the event of a housing market downturn. A number of factors influence the size of these losses, but there is evidence that losses are higher on loans to highly levered households and to property investors. The financial system is also ‘indirectly’ exposed to the housing market via the impact of a housing downturn on household consumption and economic output more generally. This exposure increases as household debt levels rise, because heavily indebted households tend to reduce spending more aggressively after a housing bust. In addition, the financial system may face losses on lending to sectors that are closely connected to the housing market e.g. the construction and commercial property sectors. Capital requirements bolster the resilience of individual financial firms against these risks, but in some circumstances they may not be sufficient to preserve the proper functioning of the financial system as a whole. As a result, macroprudential actions aimed at mitigating risks from housing market cycles may be justified to help preserve financial stability and longrun economic growth.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.rbnz.govt.nz/-/media/ReserveBank/Files/ ... 016/2016jul79-12.pdf

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:nzb:nzbbul:jul2016:12

Access Statistics for this article

More articles in Reserve Bank of New Zealand Bulletin from Reserve Bank of New Zealand Contact information at EDIRC.
Series data maintained by Reserve Bank of New Zealand Knowledge Centre ().

 
Page updated 2017-09-29
Handle: RePEc:nzb:nzbbul:jul2016:12