Asset Price Spillover, Collateral and Crises: with an Application to Property Market Policy

Dehesh and Pugh (2000) find that in several Asian countries the significance of the interdependency between the property sector and the macroeconomy has increased after the breakdown of the Bretton–Woods system. Green (1997) finds that housing leads and other types of investment lag the business cycle in the U.S. Coulson and Kim (2000) show that, in a multivariate VAR system, the residential investment shock is more important in determining the GDP than other shocks. Kan et al. (2004) also show that there are important interactions between the output movement and real estate movement in the city-level data. Gan (2003) provides micro-evidence for the “collateral channel” of Japanese firms whereby a drop in collateral value suppresses the capacity of firms to borrow and invest in the 1990s. Ogawa and Suzuki (1998, 2000) find that land value of Japanese firms has a significant effect on the degree of borrowing constraint and investment. Kwon (1998) finds that fluctuations of land prices in Japan play a role in monetary transmission mechanism by way of collateral effect. Edelstein and Lum (2004) also find wealth effect of housing price in Singapore. Leung (2007b) find that the relationship between the saving rate and the volatility of housing price crucially depends on whether the agents are subject to a binding collateral constraint.

For instance, see Tse and Leung (2002).

Throughout this paper, we will use the term “land”, “property” and “real estate” interchangeably.

An exception is Hendershott and Hu (1983) who investigate how capital is allocated between residential and non-residential uses, and how capital-market constraints offset the bias under favorable tax treatment.

See Kiyotaki and Moore (1997), Ortalo-Magne and Rady (1999, 2006), Chen (2001), Kan et al. (2004), Kwong and Leung (2000), Iacoviello (2005), Miller and Peng (2005), among others. See also Leung (2004), Leung and Quigley (2007) for a review of the literature.

For instance, see Dokko et al. (1999), Wheaton (1999).

Even in downtown Taipei and Hong Kong, it is not uncommon to find some buildings which allow for both residential and commercial usage.

Among others, see Green et al. (1994), Malpezzi at al. (1998). Malpezzi (1999) reviews the literature.

For instance, see Glaeser et al. (2004), Hwang and Quigley (2006).

The literature is too large to be reviewed here. Among others, see Leung (2004) for a review.

Jin and Zheng (2007) study a model with both entrepreneurs and entrepreneurs and analyse implications of tax policies in that environment. Their model, however, does not distinguish commercial from residential property and their focus is very different from this paper.

This assumption is not essential, but serves to simplify the algebra.

See Hart and Moore (1994) and Kiyotaki and Moore (1997) for more details in the analysis of renegotiation and debt repayment. Empirically, this is consistent with the literature of corporate finance, stating that a weak contractual enforcement is closely associated with a credit market constraint. See, for example, La Porta et al. (1997), whereby weak enforcement of shareholder rights explains a great deal of the variation in how firms are funded and owned across countries.

Apart from being a policy tool, the fraction of down payment ψ need not be a constant. It can be justified as a device to mitigate the adverse selection problem. In a more general setup, the ratio may depend on interest rates and the size of the down payment. See Stein (1995) for more discussion on a given downpayment ratio, and also the assumptions that there exists a non-trivial amount of initial mortgage debt.

For instance, see Uhlig (1996).

See, for example, Girouard and Blondal (2001). A related line of literature studies the observed instability of the empirical relation between oil prices and output. Studies find that oil shocks affect short-run economic activity by temporarily disrupting purchases of consumer durables and investment goods and by triggering an allocative effect between sectors, which generates a non-linear relation between oil prices and GDP (Hooker 1996; Davis and Haltiwanger 2001; Balke et al. 1999).

See Malpezzi (1999) for a review of the earlier literature.

See, for example, Stein (1995) and Kiyotaki and Moore (1997).

For instance, see DiPasquale and Wheaton (1996).

For instance, see Krishnamurthy (2003) for an in-depth discussion of the role of insurance when agents are liquidity constrained. See also Iacoviello (2004), Leung (2007a).

For instance, see Hanushek and Quigley (1990), Hanushek and Yilmaz (2007).

For instance, see Ben-Shahar (2004), Ben-Shahar and Feldman (2003) for related efforts.