Article ID Journal Published Year Pages File Type
5089834 Journal of Banking & Finance 2011 14 Pages PDF
Abstract
The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of borrowers. Besides other factors, this creditworthiness depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the supply of mortgages. I develop a theoretical model which explains this circular relationship. I show how different kinds of expectation formations can lead to fluctuations in real estate prices. Furthermore, I show that banks make above-average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
Authors
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