The link between the loan market and the housing market that works through mortgage loans is critically examined. Repayment of such mortgage loans depends on the future earning potential of the borrowers, which in turn depends on the overall state of the macroeconomy. Under buoyant macroeconomic conditions, all borrowers pay back their loans and both the loan market and the housing market function well. However, a temporary income shock in the economy, which undermines the repayment ability of the borrowers, may result in imprudent lending by banks thereby leading to a crisis. This calls for strict monitoring of mortgage loans by regulatory authorities.
