A Global House of Debt Effect?

A new SFL discussion paper by Dirk Bezemer (RUG) and Lu Zhang (SFL) shows that the growth of mortgages has a significant effect on recession severity after the 2007/8 global financial crisis. While this is a statement after the fact when it concerns the 2007 crisis, financial history shows that mortgage-connected crises occur regularly. Over-borrowing in real estate markets is among the most common causes of domestic financial crisis. A clearer understanding of the costs of such lending booms may help to devise policies to restrict mortgage lending to constructive levels, and to prevent high levels of mortgage lending from causing deeper recessions than would otherwise occur.


The composition of private debt matters to the severity of post-2007 recessions. Using new data on four types of bank credit over 2003-2012 for 51 economies in OLS and Bayesian averaging models, we find that changes in the share of household mortgage credit in total credit before the crisis are significantly associated with recession depth and growth loss after the 2007 crisis. This finding is robust to a wide range of control variables and to the different responses across advanced and emerging economies. Mortgage growth combined with increasing bank leverage was particularly damaging to output growth. We find evidence that investment and government consumption were channels from the change in debt composition to post-crisis recession severity. Both the level of investment and the quality of investment allocation were affected.