House prices, lending standards, and the macroeconomy

Aino Miina Silvo

    Research output: Working paperDiscussion paperScientific


    I study the link between house prices, lending standards, and aggregate over-investment in housing. I develop a model of the housing market where the credit market is affected by asymmetric information. Selection is towards less creditworthy borrowers. Asymmetric information coupled with deadweight costs of default can create endogenous boom-bust cycles in house prices. I show that lending standards are loose and the incentives for less-than-creditworthy borrowers to apply for a loan are particularly strong, first, when future house values are expected to be high, which leads to high leverage of borrowers; and second, when safe interest rates are low, which implies low costs of borrowing. However, there are strong nonlinearities in the relationship between borrowing incentives and economic fundamentals. The results shed light on incentive mechanisms that can help explain the developments in the U.S. housing market in the early 2000s. They also imply that loose monetary policy can have a direct impact on the stability of the housing market through the cost of borrowing and the opportunity cost of housing investment.
    Original languageEnglish
    Place of PublicationHelsinki
    PublisherBank of Finland
    Number of pages47
    ISBN (Electronic)978-952-323-148-1
    Publication statusPublished - 26 Jan 2017
    MoE publication typeD4 Published development or research report or study

    Fields of Science

    • 511 Economics

    Cite this

    Silvo, A. M. (2017). House prices, lending standards, and the macroeconomy. (Bank of Finland Research Discussions Papers; No. 4/2017). Helsinki: Bank of Finland.