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Real estate prices and banking performance: evidence from Canada

Journal of Economics and Finance volume 44, pages 78–98 (2020)Cite this article

Abstract

Using quarterly data from 1996 through 2018, this study explores the impact of real estate prices, real estate exuberance and real estate volatility on bank profits using a dynamic panel methodology with a unique sample of Canadian banks. The change in housing prices tends to result in a positive impact on profitability (ROA and ROE), but under risk-adjusted measures of profitability, this positive impact tends to dissipate. When exuberance exists in the real estate market, this also tends to result in a positive impact on non-risk adjusted measures of profitability. Finally, this study finds that the volatility of real estate prices has little impact on the riskiness of banking profits in Canada.

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Notes

  1. See https://www.economist.com/graphic-detail/2018/02/09/the-economist-house-price-indices

  2. Changes in the 1954 and 1967 Bank Act removed many restrictions on chartered banks, including the elimination of interest-rate caps on bank lending and providing banks to enter into the conventional insured and uninsured mortgage market. The historical regulatory changes are outside the scope of this article but please see Calomiris and Haber (2014) or Bordo et al. (2015) for further details on the Canadian banking system and regulatory changes.

  3. See https://www.bankofcanada.ca/2018/11/staff-analytical-note-2018-35/

  4. See https://business.financialpost.com/news/economy/household-debt-and-housing-remain-key-risks-for-financial-system-bank-of-canada

  5. See http://www.osfi-bsif.gc.ca/eng/wt-ow/Pages/fd-df.aspx?pedisable=true (last accessed September 20, 2018).

  6. See https://www.dallasfed.org/institute/houseprice (last accessed January 15, 2019). The authors acknowledge use of the real housing pricing dataset described in Mack and Martínez-García (2011) and use of the exuberance indicators developed in Pavlidis et al. (2016).

  7. Use of a SGMM estimator also accounts for possible correlations between any of the independent variables. For a thorough description of the various SGMM estimators, see Baltagi (2008).

  8. Dickey-Fuller (DF) and Augmented Dickey-Fuller (ADF) unit root tests are applied to all macro variables. The null of these tests is that the series contain unit roots (i.e. non-stationary series). The RGDP growth rate and the YC variable series were stationary in their original form. Unit root tests are not reported in this study but are available upon request.

  9. Following Athanasoglou et al. (2008), Chronopoulos et al. (2015) and others we model equity to assets (EtoA) as endogenous.

  10. Please note that this index is only available from Q1 2006 to Q1 2018. In addition, alternative commercial real estate price are limited in length and availability.

  11. Due to space constraints, tables of the results with the commercial rents service price index are available from the author upon request.

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Authors and Affiliations

  1. School of Accounting and Financial Service, Seneca College of Applied Arts and Technology, 1750 Finch Avenue E., Toronto, Ontario, M2J 2X5, Canada

    Robert N. Killins

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  1. Robert N. Killins
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Correspondence to Robert N. Killins.

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Appendices

Appendix A

Table 8 List of Canadian Schedule 1 banks as of 2018-Q2
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Appendix B

Table 9 Recent regulatory changes related to mortgage financing
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Killins, R.N. Real estate prices and banking performance: evidence from Canada. J Econ Finan 44, 78–98 (2020). https://doi.org/10.1007/s12197-019-09474-8

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