Housing appreciations and the (in)stable relation between housing and mortgage markets

Abstract

This paper highlights the knife-edge distinction between stable and instable relations between housing and mortgage markets. Housing appreciations and mortgage growth are related to housing market fundamentals and the interrelation between house prices and mortgage supply. These are again linked to debt-servicing ability and collateral, the two main components of a mortgagee's lending policy. The equilibrium relation between housing and mortgage markets is, while stable in scenarios where debt-servicing dominates, instable when collateral dominates the relation. The knife-edge that separates the regimes is a critical rate of appreciation and the accompanying critical leverage gain. Highlighting the knife-edge that separates these two well-known regimes, we provide a non-technical framework where conventional credit-risk assessments provide a rationale for macro-prudential policy.