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

Abstract

We use duration analysis to assess the impact of securitization, mortgage sector liberalization and government involvement in housing finance on the length of housing booms, busts and normal times in a panel of 20 OECD countries over the period 1970Q1-2015Q4. Our results reveal that a move towards a more liberalized mortgage sector is associated with longer housing booms, while an increase in securitization is linked with shorter housing busts. They also show that the length of housing booms and busts is particularly sensitive to housing finance characteristics, but that does not seem to be the case for normal times. Additionally, government support measures do not necessarily cushion against housing busts. A careful assessment of their distributional impact, as well as their effect on the trade-off between liquidity and guarantee/loan provision, is also required to prevent (longer) housing booms. All in all, housing finance regulation may prove especially relevant to shield against the damaging effects of housing busts and the financial stability risks associated with housing booms. Monetary policy can also be an important complement to macro-prudential policies. Finally, government participation in housing finance should be designed in a way that avoids an undesirable amplification of house price fluctuations.