What Drives House Price Cycles? International Experience and Policy Issues

The role of real estate during the global financial and economic crisis has prompted efforts to better incorporate housing and financial channels into macro models, improve housing models, develop macroprudential tools, and reform the financial system. This article provides an overview of major, recent contributions to the literature in relation to earlier research on what drives housing prices and how they affect economic activity. Particularly emphasized are studies, both theoretical and more strongly evidence-based, that connect housing markets with credit markets, house price expectations, financial stability, and the wider economy. The literature reveals much diversity in the international and regional behavior of house prices and the need to improve data tracking key housing supply and demand influences. Also reviewed are studies examining how monetary, macroprudential, and other policies affect house prices and access to housing. This survey is designed to help readers navigate the plethora of recent studies and understand the unsettled issues and avenues for further research. The findings should be of interest to policy makers concerned with financial stability as well as those dealing with the role of housing in the wider economy (JEL E32, E44, E63, G01, G21, R31).

Accuracy of Households’ Dwelling Valuations, Housing Demand and Mortgage Decisions: Israeli Case

Housing policy, as well as academic research, are increasingly concerned with the role of bias in subjective dwelling valuations as a proximate measure of households’ house price expectations and their relationship with housing demand. This paper contributes to this area of study by exploring the possibility of simultaneous relationships between households’ price expectations and incentive to maximise the size of housing services demanded also accounting for the supply side factors and regional perspective. The empirical estimation takes the form of a system of a two simultaneous equations model applying two stage least squares estimation technique. Cross sectional estimations utilise data extracted from the Israeli Longitudinal Panel Survey (LPS) data. Applying the best available proxy for households’ price expectations, calculated as the ratio between subjective dwelling valuations (LPS) and the estimated market value of the same properties, research has identified the interrelated factors that simultaneously influence householders’ price expectations and housing demand. Results offer conceptual and empirical advantages, highlighting the imperfect nature of the housing market, as reflected by the inseparability of bias in subjective valuations and housing decisions.

The Role of Housing and Mortgage Markets in the Financial Crisis

Ten years after the financial crisis of 2008, there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence, which suggests that inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis. The great misnomer of the 2008 crisis is that it was not a subprime crisis but rather a middle-class crisis. Inflated house-price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults. We highlight how these emerging facts have essential implications for policy.