Mortgage Fund Flows, Capital Appreciation, and Real Estate Cycles

This paper provides strong evidence for a positive feedback loop between property prices and mortgage supply, using data from the U.S. commercial property and mortgage markets over the 1991 to 2011 period. The empirical analyses control for the endogeneity of property prices, mortgage flows, mortgage interest rates, and loan to value ratios, and provide two main findings. First, exogenous increases in mortgage supply, measured with the growth of the CMBS market, significantly reduce property cap rates. Second, volatility of past price changes and the “biggest loss” in property values in the past significantly affect mortgage supply. This positive feedback loop may be an important driving force for real estate cycles.