Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy

21 Pages Posted: 5 Jul 2017

See all articles by John V. Duca

John V. Duca

Oberlin College; Federal Reserve Banks - Federal Reserve Bank of Dallas

Lilit Popoyan

Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM)

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: July 1, 2016

Abstract

From a broad macro-financial structure perspective, credit conditions have gaven rise to house price booms and busts in several advanced economies (e.g., Ireland, Spain, and the U.S.), and, more specifically in the U.S., an underpricing of risk made possible by regulatory arbitrage and shadow financing fueled the credit and twin real estate bubbles of the mid- 2000s. Across countries and over time, bubbles have been particularly acute in real estate markets reflecting not only the relatively inelastic supply of land and thin trading of real estate, but also the amplification of shocks via backward-looking price expectations and the funding of consumption off of distorted and elevated prices. Macro-prudential lessons from the Great Crisis highlight the need to prevent the build-up of excess real estate financing and limit the amplification and correlation of real estate risks. Progress has been made through imposing new tougher restrictions on the choice sets of lenders and of borrowers, with particulars varying across advanced economies. Nonetheless, regulatory reform of banking is ongoing, significant challenges remain especially in dealing with correlated risks associated with securitization.

Keywords: Macro-prudential policy, financial crises, credit crunches, real estate bubbles, regulatory arbitrage, risk-taking

JEL Classification: G28, E3, R31, R33, R38

Suggested Citation

Duca, John V. and Popoyan, Lilit and Wachter, Susan M., Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy (July 1, 2016). Available at SSRN: https://ssrn.com/abstract=2995955 or http://dx.doi.org/10.2139/ssrn.2995955

John V. Duca (Contact Author)

Oberlin College

Oberlin, OH 44074
United States

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Lilit Popoyan

Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri Della Liberta 33
Pisa, Pisa 56127
Italy

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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