CEI

Confederation Europeenne de l'Immobilier European Confederation of Real Estate Agents
21 Dec 2012

Housing cycles and financial stability

Housing cycles and financial stability

Housing markets have certain characteristics that intrinsically link them to financial stability. House price collapses can have systemic consequences. We know this from the current crisis and we know this from past crises. This fact raises a number of important questions for policymakers. In a speech at the EMF Annual Conference 2011 Peter Praet, member of the Executive Board of the ECB, poited out the role of the policymaker and turned to the question if there are price bubbles and how to identify them. He asked if a price bubble in housing markets should be dealt differently than in other assets.

Peter Praet said: “The potential risks of asset price bubbles tend to vary across asset classes. Research by the IMF has shown that housing busts are, on average, twice as costly in terms of output losses as equity price busts. This reflects the higher exposure of banks to mortgages than shares. A key conclusion of literature on historical financial crises is that they tend to have worse outcomes when banks are distressed. For example, in October 1987 stock markets around the world fell sharply, but this did not represent a threat to the banking system and so, its impact was contained. In contrast, many researchers trace the origins of the current financial crisis back to the bursting of the US house price bubble. The link between house prices, banking crises and recessions is not unique to the current situation: a number of studies examining crises in both advanced and emerging economies over time and across countries have shown that they tend to coincide with the bursting of house price bubbles. The securitisation of mortgage loans has not only tended to weaken the origination process but has tended to expose countries’ financial systems to real estate excesses in other countries. By transferring the credit risk the originator can exacerbate the boom without fear of the consequences of a collapse.”

http://www.ecb.int/press/key/date/2011/html/sp111124.en.html

Source: Website of European Central Bank, www.ecb.int

Source Picture:http://www.ecb.int/ecb/orga/decisions/html/cvpraet.en.html


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