In the event that house prices fall, these borrowers are more likely to see the value of their house fall below the amount of debt they have outstanding – particularly if they have entered the market recently. This can lead to financial hardship, mortgage defaults and, potentially, stress across the broader financial system.
Financial markets are inevitably incomplete in economists’ terminology, and it is professional judgment that fills the gap inherent in the incomplete contracts. In that sense, the deepened mutual trust, the accumulated practical and operational know-how, and the strong network of central banks, which have been established during the process of crisis management, provide a basis for substantive cooperation.