House Prices, Equity Prices, Investment and Credit - What Do They Tell Us About Banking Crises? a Historical Analysis Based on Norwegian Data

Abstract

In recent years, many countries have experienced a sharp rise in house prices and household credit. Many have expressed concern that this development is not sustainable over time and that it may lead to financial imbalances. In this article, we will consider whether historical indicators can predict banking crises through the last 150 years. Using a Hodrick-Prescott filter, we calculate the gap between actual observations and trend for real house prices, real equity prices, gross fixed investment and credit on the basis of Norwegian data back to 1819. We find that all gap indicators are useful in predicting earlier banking crises in Norway. With few exceptions, the indicators show a common pattern – the gaps widen from one to six years prior to the banking crises and subsequently fall. As a rule, at least two of the gap indicators have high values prior to the banking crises, indicating that combinations of indicators may increase the strength of the analysis. We also find that indicator values that can be associated with a banking crisis, i.e. the threshold values, may be somewhat higher in Norway than in comparable international studies.