Abstract
This study analyzes the relationship between housing prices and bank performance in Korea. To this end, using lending growth, return on assets, and non-performing loans as a performance measure, we estimate fixed-effects models for each measure. Major empirical results are summarized as follows. First, fluctuations in housing prices affect the banks’ lending decisions. If housing prices rise, banks tend to increase the volume of loans. Second, fluctuations in housing prices affect the quality of assets owned by banks. Banks’ asset soundness will improve in the case of a rise in housing prices. Third, fluctuations in housing prices have a greater impact on bank profitability when the real estate market goes bust. Our study suggests that in Korea, one of the emerging markets, there is a positive relationship between changes in housing prices and banks’ performance. In particular, banks’ profitability and soundness could be significantly hampered by a drop in housing prices. Therefore, it is necessary to be wary of excessively expanding real estate loans during the period of real estate booms.
Highlights
Understanding the price fluctuations in the real estate market is of importance because fluctuations in real estate prices have a significant impact on the soundness and profitability of the banking sector
We investigate the effect of real estate price changes on bank performance using return on assets (ROA), which is a measure of profitability, and non-performing loans (NPL), which is a measure of asset soundness
Changes in housing prices have a greater impact on bank profitability during real estate business recession than during booms
Summary
Understanding the price fluctuations in the real estate market is of importance because fluctuations in real estate prices have a significant impact on the soundness and profitability of the banking sector. One extreme case of the impact can be seen in the recent financial crisis caused by defaults on subprime mortgage loans in the United States [1,2,3]. In 2007, a significant drop in the United States housing prices caused subprime mortgage loans to start defaulting, and it eventually became a reason for a global financial crisis. As seen in this spiral effect, the reason that the real estate market sustainability is highly influential on banking sector sustainability is that banks own real estate as assets and engage in mortgage lending [4]. The credit market is an imperfect market in which information asymmetry exists between the lender and the borrower, the collateral plays a role in preventing the moral hazard of the borrower
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