The Housing Cycle: What Role for Mortgage Market Development and Housing Finance?
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The Housing Cycle: What Role for Mortgage Market Development and Housing Finance? Luca Agnello1 · Vitor Castro2,3
· Ricardo M. Sousa4,5
© The Author(s) 2019
Abstract We use duration analysis to assess the impact of securitization, mortgage sector liberalization and government involvement in housing finance on the length of housing booms, busts and normal times in a panel of 20 OECD countries over the period 1970Q1-2015Q4. Our results reveal that a move towards a more liberalized mortgage sector is associated with longer housing booms, while an increase in securitization is linked with shorter housing busts. They also show that the length of housing booms and busts is particularly sensitive to housing finance characteristics, but that does not seem to be the case for normal times. Additionally, government support measures do not necessarily cushion against housing busts. A careful assessment of their distributional impact, as well as their effect on the trade-off between liquidity and guarantee/loan provision, is also required to prevent (longer) housing booms. All in all, housing finance regulation may prove especially relevant to shield against the damaging effects of housing busts and the financial stability risks associated with housing booms. Monetary policy can also be an important complement to macro-prudential policies. Finally, government participation in housing finance should be designed in a way that avoids an undesirable amplification of house price fluctuations. Keywords Housing booms and busts · Duration analysis · Securitization · Housing finance characteristics · Government participation JEL Classification C41 · E32 · E51 · E52
NIPE’s work is financed by National Funds of the FCT - Portuguese Foundation for Science and Technology within the project ”UID/ECO/03182/2019”. Vitor Castro
[email protected]
Extended author information available on the last page of the article.
L. Agnello et al.
“... This boom-bust cycle is commonly seen as a major contributor to the global financial crisis, itself generally recognized as the most dangerous economic threat the world has faced since the Great Depression...” - Prakash Loungani (2010a, p.16).
Introduction The burst of the technological bubble in the early 2000s propelled interest rates to historically low levels, setting the pace to housing price booms in a large number of developed countries. As the subprime mortgage market collapsed in the Summer of 2007, prices sharply fell, a long and persistent slump in the housing market began and the world economy witnessed the Great Recession. These developments prompted a great deal of attention about the relevance of the housing market in explaining business cycle fluctuations (Mallick and Mohsin; 2016; Dufr´enot and Malik 2012) and its close links with the financial sector (Granville and Mallick 2009; Sousa 2010a, b). Most importantly, the severity and persistence of the Great Recession - and its roots on the sub-prime mortgage segment of the housing sector lending - highlighted four major aspects:
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