Spain and the Crisis: Housing Prices, Credit and Macroprudential Policies

Abstract

In this paper, we propose a two-country, two sector monetary union DSGE model with housing.One of the countries is calibrated to represent the Spanish economy while the other one is the rest of the European monetary union. First, we illustrate how looser credit conditions coming from the Euro area, together with increases in housing demand, lead to an increase in house prices and credit in Spain. Then, we analyze to what extent, macroprudential policies could have avoided the excess in credit that triggered the …nancial crisis in Spain. We …nd that a countercyclical loan-to-value rule that mainly responds to house prices would have mitigated the credit boom in Spain. These results can also be applied to other countries facing similar problems in the housing sector and thinking about implementing macroprudential policies.

The Housing Cycle: What Role for Mortgage Market Development and Housing Finance?

“…All in all, our work suggests that macro-prudential policies (in particular, housing finance regulation) might shield against the deleterious macroeconomic impact of housing busts and financial stability risks posed by housing booms (Arslan et al 2015a;Rubio and Carrasco-Gallego 2017;Kelly et al 2017). Additionally, it emphasizes the role that monetary policy can play, namely, by affecting interest rates and avoiding (or reducing) the likelihood of housing booms (Arslan 2014;Chen et al 2014).…”

“…Arslan et al (2015a) show that macro-prudential policies (such as, higher thresholds for the minimum downpayment requirement) lead to a substantial stabilization of house prices. Rubio and Carrasco-Gallego (2017) perform an analysis using a two-country (i.e. Spain and the rest of the European Monetary Union (EMU)), two-sector DSGE model with housing that reveals that: (i) loose credit conditions associated with a rise in housing demand propel housing booms; and (ii) macro-prudential policies (in the form of countercyclical loan-to-value (LTV) rules reacting to deviations of house prices and output from their steady states) could have avoided financial crises triggered by excessive credit growth.…”

“…Third, we investigate the impact of government participation in housing finance on the length of the housing booms and busts. These issues are particularly important, as they help understanding the role that macroprudential policy can play as a line of defense vis-à-vis housing boom-bust cycles (Kannan et al 2012;Arslan et al 2015a;Rubio and Carrasco-Gallego 2017;Kelly et al 2017). They also shed light on the optimal mix of policies -that is, the potential complementarity between monetary policy and housing finance regulation -as a way of effectively handling housing market imbalances that create financial stability risks (Rubio and Carrasco-Gallego 2014;Bailliu et al 2015;Falagiarda and Saia 2017;Gelain and Ilbas 2017;Arslan and Upper 2017).…”

How do Housing Prices and Business Cycles Interact in Spain? An Empirical Analysis

“…A fall in prices does not seem to have been achieved to cushion the fall in demand. In our opinion hardening credit conditions cause a stronger demand shock in Spain, because, as indicated by Rubio and Carrasco-Gallego (2017), its propensity to borrow is higher than that of other countries; especially, it is higher than that of the Euro area countries.…”

“…Calza et al (2009) and Ferrara and Vigna (2009) suggest that countries such as Spain, where sophisticated financial instruments for housing financing have been increasing, have financial institutions that are more willing to increase the amount of initial housing loans, because the market value of the guarantee also appreciates. Moreover, the fewer restrictions on housing financing and the further competition among financial institutions shown by the Spanish economy have contributed to raising the housing loans (Martínez and Maza 2003;IMF 2008;Rubio and Carrasco-Gallego 2017). The facts that households can obtain new funds and that people in Spain present a strong wish to own a house increase the housing investment; consequently, the GDP increases too.…”