The thesis tries to explain different nature of the dynamics during the upward and downward part of the last house price cycle in Spain, characterized by important rigidities. Covered bonds are introduced as an instrument which may accelerate a house price boom, while it may also serve as a source of correction to overvalued house prices in downturn. In a serious economic stress, lack of investment opportunities motivates investors to buy the covered bonds due to the strong guarantees provided, which may in turn help to revitalize the credit and housing markets.
To address such regime shift, house price dynamics is modelled within a framework of mutually related house price, credit and business cycles using smooth transition vector autoregressive model. Linear behaviour of such system is rejected, indicating the need to model house prices in a nonlinear framework. Also, importance of modelling house prices in the context of credit and business cycles is confirmed. Possible causality from issuance of covered bonds to house price dynamics was identified in this nonlinear structure.
Finally, potential threat to financial stability resulting from rising asset encumbrance both in the upward and downward part of the house price cycle was identified, stressing the need to model impact of the covered bonds on house prices in a situation when Basel III liquidity requirements motivate towards use of this instrument.
Table of Contents
2. House price dynamics and financial crisis in Spain
2.1 House prices in the context of real economy and financial system
2.2 Determinants of house prices: Literature review
2.3 Why house prices in Spain did not drop more significantly?
2.4 Role of securitization in house price dynamics: Motivation
3. Covered bonds and their link to house price dynamics
3.1 What is covered bonds
3.2 Cédulas Hipotecarias and mortgage financing in Spain
3.3 Behaviour of the covered bond markets under stress
3.4 Dynamics of covered bonds and implications for financial stability
3.5 Relationship between covered bonds and housing market
3.6 Data analysis: Spain
3.7 Data analysis: Selected countries
4. Empirical analysis
4.1 Motivation
4.2 Introduction to nonlinear modelling
4.2 Options for ST(V)AR models and its empirical practice
4.4 Empirical model of house price dynamics and covered bonds
Research Objectives and Key Topics
The thesis aims to analyze the asymmetrical dynamics of Spanish house prices during the recent economic cycle, focusing on the role of covered bonds as a potential corrective mechanism during market downturns and an enhancement factor during booms. The research investigates whether these instruments, which remained resilient during the financial crisis, contributed to the observed rigidities in price adjustments by influencing credit availability and market liquidity within a nonlinear framework.
- Asymmetric house price dynamics in Spain
- The role of covered bonds in credit and housing market cycles
- Nonlinear regime switching models in macroeconomics
- Comparative analysis of securitization instruments (Covered Bonds vs. MBS)
- Financial stability implications of asset encumbrance
Excerpt from the Book
Why house prices in Spain did not drop more significantly?
The case of Ireland is often put into comparison with Spain as another example of a house price bubble that was built prior to the last financial crisis. In comparison to Spain, however the real house prices dropped more significantly and rapidly in the first years following the bubble bust. In Spain, the most frequent declaration concerning the house price bubble is that it is of speculative nature and there is clear evidence of vast quantity of dwellings that are empty for the majority of the year. How then comes that such an excess of supply has not driven house prices down?
The role that the credit financing played in creating the house prices bubble suggests that holders of those dwellings, which were bought for speculative purposes, suddenly turned reluctant to sell their real estate, since offering it for a significantly lower price would leave them with negative equity. On the other hand, expectations of the potential buyers about house price burst lead to reluctance to buy for existing prices. Mortgages were often used to finance not only primary, but also secondary housing or purchases which were motivated by speculative reasons. This draws attention to rigidities on house price market in Spain and rises question about the role of rental market in returning these house prices back to the level determined by economic fundamentals.
Summary of Chapters
2. House price dynamics and financial crisis in Spain: This chapter reviews the transmission mechanisms between the real economy, the housing market, and the financial sector, highlighting the specific drivers of the Spanish housing boom and the subsequent market rigidities.
3. Covered bonds and their link to house price dynamics: This section details the fundamental characteristics of covered bonds, compares them to mortgage-backed securities, and analyzes their behavior under market stress and their role in overall financial stability.
4. Empirical analysis: This chapter introduces the methodology for nonlinear modeling, specifically the smooth transition vector autoregressive (STVAR) framework, and presents the results of the model estimations regarding the impact of covered bonds on house price dynamics.
Keywords
House price dynamics, credit cycle, housing market rigidities, covered bonds, securitization, smooth transition vector autoregressive models, asymmetric behaviour, financial stability, asset encumbrance, Spain, mortgage financing, Basel III, nonlinear modeling, regime switching, credit market.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines the asymmetric behavior of Spanish house prices throughout the last cycle and specifically evaluates how the issuance of covered bonds influenced this dynamics during both boom and bust phases.
Which sectors does the research address?
The study focuses on the intersection of the housing market, the credit sector, and the broader real economy, with a specific focus on financial instruments like covered bonds.
What is the primary research goal?
The goal is to determine if covered bonds act as a source of market correction during downturns or an enhancement factor during upturns, particularly in the context of the recent financial crisis.
What methodology is employed for the analysis?
The research uses a nonlinear framework, specifically applying vector smooth transition autoregressive (STVAR) models to capture the regime-switching behavior of the variables involved.
What is covered in the main body of the work?
The main body covers the theoretical determinants of house prices, a detailed analysis of covered bonds versus other securitization products, and an empirical assessment of the relationship between these bonds and house price cycles.
Which keywords define this study?
Key terms include house price dynamics, covered bonds, securitization, asymmetric behavior, nonlinear modeling, and financial stability.
How do covered bonds differ from mortgage-backed securities?
The thesis highlights that covered bonds remain on the issuer's balance sheet and provide double recourse to investors, whereas mortgage-backed securities often involve removing assets from the balance sheet, leading to distinct risk profiles.
What unique data source does the author use?
The author utilizes a non-public, monthly dataset on covered bond issues obtained from the Asociación Hipotecaria Española, which allows for a more precise analysis than standard annual data.
What conclusion does the author reach regarding covered bonds?
The author concludes that while covered bonds can provide necessary liquidity during market freezes, they also introduce risks of asset encumbrance and can potentially exacerbate procyclicality if they are over-relied upon in a falling market.
- Citation du texte
- Hana Hejlova (Auteur), 2014, Impact of Securitization on House Price Dynamics in Spain, Munich, GRIN Verlag, https://www.grin.com/document/312365
