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