Impact of Securitization on House Price Dynamics in Spain

Inhaltsverzeichnis (Table of Contents)

• Introduction
• House price dynamics and financial crisis in Spain
  • House prices in the context of real economy and financial system
  • Determinants of house prices: Literature review
  • Why house prices in Spain did not drop more significantly?
  • Role of securitization in house price dynamics: Motivation
• Covered bonds and their link to house price dynamics
  • What is covered bonds
    • Definition
    • Characteristics
    • Supply and demand for covered bonds
    • Legal foundation and classification
    • Markets with covered bonds
    • Differences between CB, non-secured debt and MBS
  • C´edulas Hipotecarias and mortgage financing in Spain
  • Behaviour of the covered bond markets under stress
  • Dynamics of covered bonds and implications for financial stability
  • Relationship between covered bonds and housing market
  • Data analysis: Spain
  • Data analysis: Selected countries
• Empirical analysis
  • Motivation
  • Introduction to nonlinear modelling
  • Options for ST(V)AR models and its empirical practice
  • Suggested approach to modelling using STVAR models
  • Empirical model of house price dynamics and covered bonds
    • Approach
    • Data
    • Models
    • Results

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis examines the distinct dynamics of house prices during the last house price cycle in Spain, particularly focusing on the differences between the upward and downward phases. The analysis aims to explain these dynamics in the context of significant household indebtedness and the widespread use of covered bonds for mortgage funding.

• The impact of covered bonds on house price dynamics in both upward and downward phases of the cycle
• The role of covered bonds in a framework of mutually related house price, credit, and business cycles
• The potential financial stability risks associated with the use of covered bonds in a context of rising asset encumbrance
• The implications of the Basel III liquidity requirements for the use of covered bonds and their potential impact on house prices
• The application of smooth transition vector autoregressive (STVAR) models to analyze nonlinear relationships in house price dynamics

Zusammenfassung der Kapitel (Chapter Summaries)

• The Introduction provides an overview of the research topic, highlighting the importance of understanding house price dynamics in Spain during the last financial crisis. The paper argues that the widespread use of covered bonds may offer a unique explanation for the differences in house price adjustment observed in various countries.
• Chapter 2 delves into the dynamics of house prices in Spain in the context of the real economy and financial system. It examines the interaction between business, credit, and house price cycles, highlighting the potential for procyclicality and financial instability. It discusses various determinants of house price dynamics, including income, interest rates, and lending conditions, and explores the role of prudential regulation.
• Chapter 3 provides a detailed overview of covered bonds (CBs), their characteristics, and their differences from other forms of secured debt and asset-backed securities. The chapter explores the supply and demand for CBs, highlighting their role in attracting conservative investors and providing a source of cheap and liquid financing. The chapter then examines the specific features of CBs in Spain, including their legal framework, market structure, and their importance in mortgage financing.
• Chapter 4 delves into the empirical analysis of the relationship between covered bonds and house price dynamics. It examines the behavior of covered bond markets under stress, focusing on the financial and sovereign crises in the EU. The chapter analyzes the possible impact of covered bonds on financial stability, discussing potential procyclicality and risks associated with increasing asset encumbrance. It then examines the relationship between covered bonds and the housing market, exploring how they may contribute to house price bubbles and potentially facilitate a return to equilibrium during downturns.

Schlüsselwörter (Keywords)

This work focuses on the dynamics of house prices, the credit cycle, and the role of covered bonds in the Spanish housing market. Key themes include rigidities in the housing market, asymmetric house price behavior, the impact of securitization, and the potential implications of covered bonds for financial stability. The study employs smooth transition vector autoregressive models to investigate these relationships.

Frequently Asked Questions

How do covered bonds impact house price dynamics?

Covered bonds can accelerate a house price boom by providing cheap credit, but they can also serve as a source of correction or revitalization during an economic downturn due to their strong guarantees for investors.

What is the significance of the Spanish house price cycle?

The Spanish cycle is characterized by important rigidities and asymmetric behavior between upward and downward phases, making it a unique case for studying nonlinear house price dynamics.

What are "Cédulas Hipotecarias"?

Cédulas Hipotecarias are the specific Spanish form of covered bonds used extensively for mortgage financing in the Spanish banking system.

What are the risks of asset encumbrance?

Rising asset encumbrance through covered bonds can pose a threat to financial stability, as it limits the pool of unencumbered assets available to unsecured creditors in case of a bank failure.

How does Basel III influence the use of covered bonds?

Basel III liquidity requirements motivate banks to use covered bonds as a liquid and reliable funding instrument, which in turn can influence house price dynamics.

What is a STVAR model?

A Smooth Transition Vector Autoregressive (STVAR) model is a nonlinear statistical framework used to capture regime shifts and mutually related cycles in house prices, credit, and the economy.