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Collateral quality and house prices

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  • Zhou, Jing

Abstract

This paper studies the effects of collateral quality shocks on house prices, the price-rent ratio, and the macroeconomy in a dynamic general equilibrium model with housing collateral. Collateral quality is not as perfect as is typically assumed in the existing literature on collateral constraints, and collateral quality shocks can simultaneously explain the salient features of the joint dynamics of house prices, the price-rent ratio, and output observed in the data. Moreover, depending on whether or not information about collateral quality is produced, there exist two lending regimes; endogenous switching between these two regimes also reinforces the patterns. I estimate this model using Bayesian methods and identify a conspicuous endogenous regime switch at the onset of the Great Recession. The results show that collateral quality shocks and the associated regime switch account for a large fraction of the variations in house prices and the price-rent ratio during the housing boom and bust of the 2000s.

Suggested Citation

  • Zhou, Jing, 2022. "Collateral quality and house prices," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:dyncon:v:145:y:2022:i:c:s0165188922002184
    DOI: 10.1016/j.jedc.2022.104514
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    More about this item

    Keywords

    Collateral quality; Endogenous regime switching; House prices; Price-rent ratio; Collateral constraint;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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