Residential Housing Market and Bank Stability: Focusing on OECD and Emerging Asian Countries

Abstract

In this study, we examine whether the fluctuation of residential housing prices affects the stability of financial institutions in 31 Organization for Economic Co-operation and Development (OECD) and emerging Asian countries. Utilizing 272,530 unique observations from 1990 to 2017, we explore effects of residential financing on bank stability mostly channeled by housing prices as a collateral effect, and by a type of moral hazard due to asymmetric information between borrowers and lenders. We first apply pooled mean group (PMG) estimators to isolate housing market price deviations from the market's fundamental equilibrium, and then we conduct analysis using bank stability measures including return on assets (ROA,) and non-performing loan ratios (NPL). Results indicate that price deviation in the housing market from fundamental equilibrium is statistically significant for bank stability measures and persists in OECD countries over longer time horizons compared to emerging Asian countries. The findings also imply that loan growth represents a critical factor determining the level of bank stability while result from individual countries vary according to the relative maturity of their economy, level of interdependency between housing market and banking sector, and regulative environment for residential housing finance.