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Leveraged property cycles

Author

Listed:
  • Jaccard, Ivan

Abstract

This paper studies the effects of imperfect risk-sharing between lenders and borrowers on commercial property prices and leverage. The key friction is that agents use different discount rates to evaluate future flows. Eliminating this pecuniary externality generates large reductions in the volatility of real estate prices and credit. Therefore, policies that enhance risk-sharing between lenders and borrowers reduce the magnitude of boom-bust cycles in real estate prices. We also introduce health shocks to study the effect of the COVID-19 crisis on the commercial property market. JEL Classification: E32, E44, G10, E23

Suggested Citation

  • Jaccard, Ivan, 2021. "Leveraged property cycles," Working Paper Series 2539, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212539
    Note: 737337
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2539~49ba575162.en.pdf
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    More about this item

    Keywords

    asset pricing; incomplete markets; leverage cycle; pecuniary externalities;
    All these keywords.

    JEL classification:

    • 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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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