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Housing Market Bubbles, Credit and Crashes
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Housing Market Bubbles, Credit and Crashes

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Financial Markets".

Deadline for manuscript submissions: closed (31 July 2019) | Viewed by 19802

Special Issue Editor

Prof. Dr. Dirk Baur

E-Mail Website
Guest Editor
Accounting and Finance (UWA Business School), The University of Western Australia (M251)35 Stirling Highway, Crawley, WA 6009, Australia
Interests: gold; financial contagion; virtual currencies; shadow banking; sustainable finance; dependence modelling; quantile regression

Special Issue Information

Dear Colleagues,

One of the causes of the Global Financial Crisis in 2008 was the combination of a credit boom and a housing bubble. Whilst the analysis of this specific episode is important and evidenced by a growing academic literature, more fundamental research is required to better understand the interaction between credit, housing bubbles and subsequent corrections.

A house is often the largest single asset of a household and determines both consumption and investment. In addition, the credit linked to the house plays an important role in the aggregate portfolios of financial institutions. The behaviour of house prices thus exerts a significant influence on the real economy, financial institutions and monetary policy. An understanding of these interactions is important to identify the factors that enhance economic, financial and monetary stability.

Housing as an asset class exhibits characteristics that are very different when compared with other asset classes such as equity or bonds: Housing can be both a consumption asset (owner-occupied) and an investment asset. Other distinguishing characteristics of the housing market are short-sale constraints and relative illiquidity.

Finally, bubble-like price movements or excess house prices may lead to excess household debt and restrict the access to affordable housing for an increasing group of the population and, thereby, increase inequality within generations and between generations.

In this Special Issue, we are open to research on housing market bubbles in general and research addressing the following questions in particular:

  • What causes bubbles and crashes in the housing market?
  • How can bubbles and crashes be avoided?
  • What role plays credit in the housing market?
  • Is excess mortgage debt related to housing bubbles and crashes?
  • Are extreme house price movements different than price movements in other asset classes?
  • Is the housing market more susceptible to bubbles and crashes than other markets?
  • Is the availability and type of mortgage credit linked to extreme price movements in the housing market?
  • What explains cross-country differences in the occurrence of housing bubbles and crashes?
  • Does globalization (foreign capital) affect local housing markets?
  • Does the evolution of housing as an asset class (financialization) increase the likelihood of house price bubbles?
  • Do house price bubbles increase inequality?
  • Are housing marekt bubbles more likely with fixed rate mortgage loans or with floating rate mortgage loans?
  • Do ultra-low interest rates cause housing bubbles?
Prof. Dr. Dirk Baur
Guest Editor

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Keywords

  • housing market
  • bubbles and crashes
  • mortgage credit
  • short-sale constraints and illiquidity
  • affordability and inequality

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Published Papers (4 papers)

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Research

20 pages, 2826 KiB  
Article
The Role of the Federal Reserve in the U.S. Housing Crisis: A VAR Analysis with Endogenous Structural Breaks
by Mahua Barari and Srikanta Kundu
J. Risk Financial Manag. 2019, 12(3), 125; https://doi.org/10.3390/jrfm12030125 - 23 Jul 2019
Cited by 5 | Viewed by 4493
Abstract
This paper reexamines the role of the Federal Reserve in triggering the recent housing crisis. Specifically, we explore if the relationship between the federal funds rate and the housing variables underwent structural changes in the wake of the housing crisis. Using quarterly data [...] Read more.
This paper reexamines the role of the Federal Reserve in triggering the recent housing crisis. Specifically, we explore if the relationship between the federal funds rate and the housing variables underwent structural changes in the wake of the housing crisis. Using quarterly data spanning 1960–2017, we estimate a VAR model involving federal funds rate, real GDP growth and a housing variable (captured by house price inflation or residential investment share or housing starts) and conduct time series analysis for the pre- and post-crisis periods. While previous studies mostly set break-dates based on events known a priori to split the full sample to subsamples, we endogenously determine structural break points occurring at multiple unknown dates. Our Granger causality analysis indicates that the federal funds rate did not cause house price inflation, although it caused residential investment share and housing starts in the pre-crisis period. In the post-crisis period, the real GDP growth caused residential investment and housing starts while house price inflation had a momentum of its own. Our impulse response and forecast error variance decomposition analysis reinforce these results. Overall, our findings suggest that housing volume fluctuates more than house prices over the business cycle. Full article
(This article belongs to the Special Issue Housing Market Bubbles, Credit and Crashes)
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16 pages, 1429 KiB  
Article
U.K. House Prices: Bubbles or Market Efficiency? Evidence from Regional Analysis
by Yi Wu and Nicole Lux
J. Risk Financial Manag. 2018, 11(3), 54; https://doi.org/10.3390/jrfm11030054 - 13 Sep 2018
Cited by 7 | Viewed by 6763
Abstract
This paper studies U.K. regional house prices across nine regions from January 2005 to December 2017 to identify regional versus national effects on house prices and potential house price bubbles. It uses a version of the Gordon dividend discount model, modelling house prices [...] Read more.
This paper studies U.K. regional house prices across nine regions from January 2005 to December 2017 to identify regional versus national effects on house prices and potential house price bubbles. It uses a version of the Gordon dividend discount model, modelling house prices as the present value of imputed rents as a measure of fundamentals. It differentiates between long-term and short-term effect using pooled mean group (PMG) and mean group estimation (MG) to determine variations in regional house prices during different periods relating to the most recent financial crisis. The results confirm that the crisis had differentiating effects in the short term, but there is reversion back to long-run fundamentals. Regional trend analysis shows that the house price growth in the regions has been affected differently in the short run and each region has varying long-run fundamentals. Residential property values in London have shown strongest short-run momentum. Full article
(This article belongs to the Special Issue Housing Market Bubbles, Credit and Crashes)
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18 pages, 338 KiB  
Article
Housing Market Bubbles and Mortgage Contract Design: Implications for Mortgage Lenders and Households
by Geoffrey Poitras and Giovanna Zanotti
J. Risk Financial Manag. 2018, 11(3), 42; https://doi.org/10.3390/jrfm11030042 - 17 Jul 2018
Viewed by 3839
Abstract
This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, [...] Read more.
This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, this paper provides equilibrium conditions demonstrating the risk reduction benefits of shorter term to contract maturity at origination for lenders of long amortization mortgage contracts. In addition, the risks of underpricing prepayment and no recourse default options in the mortgage contract when compared with full recourse mortgage contracts having yield maintenance prepayment penalties are explored by contrasting the ability of US and Canadian mortgage funding systems to withstand a housing market bubble collapse that might occur. Full article
(This article belongs to the Special Issue Housing Market Bubbles, Credit and Crashes)
13 pages, 1537 KiB  
Article
Bidding Behavior in the Housing Market under Different Market Regimes
by Jon Olaf Olaussen, Are Oust and Ole Jakob Sønstebø
J. Risk Financial Manag. 2018, 11(3), 41; https://doi.org/10.3390/jrfm11030041 - 15 Jul 2018
Cited by 7 | Viewed by 4057
Abstract
The aim of this paper is to investigate whether different market regimes affect bidding behavior in housing auctions. Taking advantage of special circumstances in the Norwegian housing market in 2015 and 2016, we conduct a survey involving 1803 respondents in three of Norway’s [...] Read more.
The aim of this paper is to investigate whether different market regimes affect bidding behavior in housing auctions. Taking advantage of special circumstances in the Norwegian housing market in 2015 and 2016, we conduct a survey involving 1803 respondents in three of Norway’s largest cities, Oslo, Stavanger and Trondheim. In the Norwegian housing market 90 percent of dwellings are sold after an English auction. Norway has a rather homogeneous market, with the same laws, traditions, interest rates and approximately the same tax rates applying across the country. However, in December 2016, the two-year nominal house price increase was 34.8 percent in Oslo and 14.8 percent in Trondheim, whereas prices fell 7.8 percent over the same period in Stavanger. We find that households in booming housing markets appear to believe that a more aggressive bidding strategy is advisable to obtain a dwelling at the lowest possible price, compared with households in bust markets. Evidence suggesting that bidders in booming markets are less likely to decide on a maximum price limit before an auction commences substantiates this finding. In addition, we find that bidders in booming markets have a weaker reliance on real estate agents. Full article
(This article belongs to the Special Issue Housing Market Bubbles, Credit and Crashes)
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