Real Estate Cycles and Bank Systemic Risk, Business and Economics, Macquarie University

Area of Interest

Financial Market Developments

Project Summary

Australian real estate prices continue to rise notwithstanding the GFC and massive falls that have occurred elsewhere. Several factors raise the possibility of a major price correction, including: unwinding of the mining investment boom, rising unemployment from the loss of manufacturing due to high currency values, and a falling labour participation rate due to the ageing of the population. Systemic risk in Australia is crucially dependent upon capacity of major banks to withstand extreme falls in property prices. The project will develop a model for exposure of the Australian banking industry to the risk of a real estate crisis. In particular we will create a crisis 'temperature gauge', by building a hazard model that utilises time variation in relevant market prices, economic data and country characteristics. Since the extent to which prices are disconnected from fundamentals is key, this project also models the relation between commercial and residential real estate prices with fundamentals using standard hedonic regressions and novel non-parametric regression trees.

Research Team

Team Leader: Dr Egon Kalotay, Business and Economics, Macquarie University

Researchers: Professor Edward Altman | Professor of Finance, Business, New York University Associate Professor Geoffrey Loudon | , Department of Applied Finance and Actuarial Studies, Business and Economics, Macquarie University Professor Stefan Trueck | Co-Director Centre for Financial Risk, Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University

See the full research details here.