In the housing market, prolonged periods of unsustainably loose mortgage lending standards have often resulted in costly recessions and financial crises, with long-lasting adverse implications for the economy as a whole.
There is a range of channels through which this mechanism operates, including the spending behaviour of highly-indebted borrowers in a downturn or the impact of large mortgage losses by lenders in a stress.4 Overall, though, the evidence across countries and over time is very consistent: credit-driven housing booms have very often been associated with severe subsequent recessions.5 Similar dynamics can operate in the commercial real estate market.