Home > Uncategorized > Leveraged housing bubbles: ‘the worst case of all’.

Leveraged housing bubbles: ‘the worst case of all’.

Recent research shows that credit fuelled housing bubbles are extremely dangerous and detrimental. Two examples:

Dirk Bezemer and Lu Zhang have a new paper. About leveraged housing bubbles. Ahem:

Using new data on four types of bank credit over 2000-2012 for 51 economies in OLS and Bayesian averaging models, we find that changes in the share of household mortgage credit in total credit before the crisis are significantly associated with recession depth and growth loss after the 2007 crisis. This finding is robust to a wide range of control variables and to the different responses across advanced and emerging economies. The evidence also suggests that mortgage growth combined with increasing bank leverage was particularly damaging to output growth.
Òscar Jordà, Moritz Schularick, Alan Taylor have a new paper. About leveraged housing bubbles. Ahem:
Drawing on 140 years of data, this column argues that leverage is the critical determinant of crisis damage. When fuelled by credit booms, asset price bubbles are associated with high financial crisis risk; upon collapse, they coincide with weaker growth and slower recoveries. Highly leveraged housing bubbles are the worst case of all.
  1. September 4, 2015 at 1:50 pm

    It’s good that when the dust finally settles simple bank-credit fuelled housing bubbles are seen as the root of the crisis. Some of us have been saying this intuitively since 2008. The root problem is that we allow banks to create the money that drives up the value of their collateral, inflating both sides of their balance sheet.

    In the aftermath of the financial crisis lots of people rushed to blame exotic financial instruments like credit default insurance. These contributed to making the financial system fragile, but fragility is the second-order problem. Loops in value creation between credit and collateral are the first-order problem that we’re still not addressing.

  2. September 4, 2015 at 5:00 pm

    I think that the shear volume of transactions in the housing market would contribute significantly to the effect of credit booms and price bubbles on the overall economy.

  3. Macrocompassion
    September 5, 2015 at 4:04 pm

    Pavlos, 100% correct! Indeed, some others of us have been saying this since 1879, particularly one Henry George in his classic book “Progress and Poverty”.

    According to the Georgist’s international community, this unstable feature of modern macroeconomics occurs every 18 years, unless a war or some huge natural disaster delays it. However I hesitate to correct your last paragraph and to claim that the basic cause of the financial crises is not due to the money, credit and insurance side but due to the ability for speculation in land values (a poor government phenomenon), which later manages to include the banks themselves. George’s answer was to introduce a different taxation regime which is to apply it to land values alone.

  4. September 8, 2015 at 7:35 am

    And the best way to keep land prices low and stable? Land Value Tax.

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