House Prices and Bank Stability: Evidence from Emerging Countries

Abstract

This study aims to provide empirical evidence whether the real estate price affects bank stability in emerging countries under the different levels of economic growth (GDP per capita) and capital inflows (foreign direct investments and portfolio investments). The two competing hypotheses which are collateral value hypothesis and deviation hypothesis are used in attempt to explain these relationships. The threshold model is applied and the results show that during bad economic conditions and capital outflows (below threshold effects), only deviation hypothesis holds using house price deviations as house price determinant, the house prices highly deviate from their fundamental value and cause the lower bank stability. While in the period of expanding or good economic conditions (above threshold effects), collateral value hypothesis holds using house price index as house price determinant. However, high capital inflows and good economic conditions has a positive effect on bank stability.