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Working Papers

Real Estate and The Great Crisis: Lessons For Macroprudential Policy

Working paper #818
John V. Duca, Lilit Popoyan, Susan M. Wachter
Contemporary Economic Policy

Credit conditions have caused real estate booms and busts, owing to an underpricing
of credit risk aided by regulatory arbitrage and shadow financing. Across countries, real
estate price and credit bubbles have reflected not only inelastic land supply and thin
trading, but also the amplification of shocks via backward-looking price expectations
and financing based on distorted prices. Macroprudential lessons from the Great Crisis
include preventing excess real estate financing and limiting the amplification and
correlation of risks. Nonetheless, the costs and benefits of recent regulations require
re-evaluation amid an ongoing need to address correlated risks from shadow financing
and securitization. (JEL G28, E3, R31, R33, R38)

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