House prices, (un)affordability and systemic risk

Abstract

This is the first paper to examine the role of the real estate sector and housing unaffordability in the determination of systemic risk. We measure the systemic risk of the UK by employing the ∆CoVaR method developed by Adrian and Brunnermeier (2011, 2016), and we explore both its cross-sectional and time series behaviour. Regarding the former, we show that when the real estate sector is under distress the tail risk of the entire financial system increases significantly. With respect to the latter, the findings of our dynamic model suggest that sustainable house prices positively contribute to the stability of the financial sector; whilst house price exuberance and rapid increases in housing unaffordability amplify systemic risk. Finally, we examine the conjecture that the banking sector comprises a transmission channel from the housing market to the systemic risk of the financial system. Our empirical results are in line with this argument and highlight the key role of housing unaffordability.

House prices and affordability

“…Housing can also have negative consequences for the financial sector, as the GFC of 2008-2009 amply demonstrated. Pavlidis, Paya, and Skouralis (2020) distinguish sustainable increases in house prices from those driven by exuberance, showing that the latter undermines the resilience of the financial sector, while the former enhances it.…”

What Happened: Financial Factors in the Great Recession

“…As an example, the excess bond premium increased by 275 basis points at the time of the Lehman default. 8 The bottom panel in Figure 4 shows the accompanying behavior of the real sector, including GDP and four key components: residential investment, consumer durables, producer durables, and nondurable consumption. (All variables are in logs.)…”

“…The idea is to have a pure measure of the excess return that is not confounded by expectations of default. The excess bond premium in the financial sector is constructed in an analogous manner for publicly traded companies in the financial sector 8. As emphasized byAdrian, Colla, and Shin (2012) andBecker and Ivashina (2014), the deterioration in the financial health of commercial banks induced many nonfinancial borrowers to switch from bank to public debt markets to obtain credit, placing upward pressure on the excess bond premium.…”

Rising immigration and falling native-born home ownership: a spatial econometric analysis for New Zealand

“…An earlier review of impacts of net international migration on housing markets has similar conclusions (Cochrane and Poot, 2016). There are good reasons for prior studies to look at house prices, as there are concerns that price rises due to exuberance may add systemic risk to the financial sector (Pavlidis et al, 2021) while at the micro level reduced affordability hinders reallocation of workers into more productive areas (Nunns, 2021). Yet some public concern about house prices likely is from feared effects on home ownership and so it is useful to directly examine immigration impacts on home ownership.…”