The effect of house prices on bank risk: empirical evidence from Hungary

Adam Banai and Nikolett Vágó
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Nikolett Vágó: Magyar Nemzeti Bank

No 289, NBP Working Papers from Narodowy Bank Polski

Abstract: Housing market is important from a macroprudential perspective because it has a strong effect on the banking sector. Changes in real estate prices may affect the level of bank risk through household mortgage lending, however, the literature has no clear conclusion on this impact mechanism. Using a bank-level database containing quarterly data from 1998 to 2016 we estimated dynamic fixed-effects panel models to examine how bank risk is influenced by housing prices via mortgage lending in the Hungarian banking system. According to the results (1) higher house prices lead to higher bank risk, (2) the higher the share of mortgage loans at a bank, the stronger the positive effect of house prices on bank risk. In the period following the onset of the crisis a much stronger positive relationship could be observed between house prices and bank risk than before the crisis. Using the house price gap which measures the deviation of house prices from their fundamental value we provide empirical evidence that the deviation hypothesis was stronger for Hungary. This suggests that both banks and households tend to undertake excessive risks during a housing market boom, which can be mitigated by macroprudential policy instruments.

Keywords: bank risk; house price index; mortgage loan; real estate market (search for similar items in EconPapers)
JEL-codes: C23 G21 G28 G30 (search for similar items in EconPapers)
Pages: 36
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-tra and nep-ure
Note: The authors would like to thank Bálint Dancsik and Mikko Mäkinen for their valuable suggestions. They are also grateful for the participants of the “Recent trends in the real estate market and its analysis (2017)” workshop in Warsaw, and the “15th ESCB Emerging Markets (2017)” workshop in Saariselka for their useful comments.
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:289

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