The Unassuming Economist

Global Housing Market: Spring in the air?

In a special report on house prices on March 30th 2002, the Economist said that if there is one single factor that has saved the world economy from a deep recession it is the housing market. In contrast, during the Great Recession (December 2007 to June 2009), the housing market was cast as the villain of the piece. How has the housing market fared since the end of the Great Recession? An updated global index of house prices has shown a mild sign of an uptick. Both the equally-weighted index and GDP-weighted index measures of global house prices show signs of improvement in house prices (see Chart 1).

Chart 1. Global House Price Index

Zooming in, house prices around the world have followed different trajectories. In some parts of the world, house prices have appreciated or recovered, in others they continue to fall. For example, house prices for the United States have improved, while the outlook for house prices in a good part of Europe is gloomy.

Chart 2. House Prices around the World

Still room for house price correction?

Chart 3 shows that in Canada, Belgium, Australia, United Kingdom and others, the house prices-to-income ratio and the house prices-to-rent ratio is still above historical averages. At the the other end, in Japan, United States, Germany, Greece and other countries, these rations are now below historical averages.

Chart 3. House Prices Relative to Incomes & Rents: Current Ratios Compared With Historical Averages 

Assessing the outlook for house prices requires a more detailed look than just these historical ratios. In recent months, IMF staff have written about the outlook in Canada, Denmark, France, Hong Kong, Ireland and South Korea.

House price growth moderated in 2012, although with some regional variation. National house prices fell 1.2 percent over the second half of 2012, driven mainly by the sharp retrenchment in British Columbia. In turn, this was mainly the consequence of a sharp correction of prices in the Vancouver area, where condos prices were down to their 2010 levels as of December 2012. On a yearly basis, national house prices index is still up by about 3.5 percent in 2012, slightly down from the 6 percent growth in 2011, with Toronto, Calgary and in particular Regina posting the largest increases, according to a new IMF report on Canada.

Moreover, the report points out that house prices are still on the strong side. As of December 2012, at a national level house prices were still almost 30 percent above their January 2009 trough. In Q3:2012, the house price-to-rent ratio was 60 percent above its historical average in Canada, more than in any other advanced economies with the only exception of Norway and Belgium. Price-to-income ratios also look high, and at almost 40 percent above their long-term average are among the highest.

The latest IMF’s report on Denmark says that: 

The Danish housing market continued its decline through 2011 and the first half of 2012, despite a short respite in 2010. Real house prices have fallen by 26 percent since their peak in 2007Q1, after a two-year period in which prices rose by over 60 percent. Housing starts declined by 17 percent in 2011, and by 28 percent in the first half of 2012 relative to the first six months of 2011. Year-on-year prices for the residential properties fell by 5–6 percent in 2012 Q2.

Indicators of house price misalignment are mixed. The price-to-income ratio and price-to-rent ratio remain above their 1970–2010 historical averages but by less than one standard deviation (0.7 and 0.9 respectively).

The housing market remains vulnerable. Mortgage loans with variable rates and deferred amortization loans (interest-only for 10 years) account for 74 and 56 percent of the mortgages respectively. Given the high debt levels of Danish households, this creates a threat of higher delinquencies should rates rise or incomes fall.

Two different pricing models are examined, which provide some mild, but on balance inconclusive, evidence that prices are higher than suggested by current fundamentals.

Housing in Hong Kong SAR is expensive. Compared to other regions, house prices in Hong Kong SAR are less affordable as measured by the ratio of median household income to median house price. In absolute terms, U.S. dollars per square meter, prices are also relatively expensive and premium real estate prices are on par or higher than in other high-cost housing.

A regression-based approach indicates prices are about 10 percent above the level suggested by current macroeconomic fundamentals.However, the fundamentals themselves are in some sense abnormal, as loose global monetary conditions have pushed down considerably Hong Kong SAR’s real interest rate. The real interest rate, moreover, is a key driver of housing prices in the model. To illustrate the impact of the eventual normalization of global monetary conditions, the regression estimates were used to calculate the price that would prevail if the real interest rate was at its 2003–07 average, with a concomitant change to credit. This exercise suggests that housing prices are some 30 percent higher than they would be if Hong Kong SAR’s real interest rate returned to the 2003–07 average. An asset pricing model, however, finds that prices are broadly consistent with fundamentals. The model compares the market price with a benchmark based on an equilibrium relationship between prices, rents, and cost of ownership. The basis for assessing misalignment from fundamentals is that the cost of owning a house (imputed rent) should be the same as the cost of renting a similar house for the same time period. By this measure, smaller-sized flats are found to be some 7 percent above the benchmark while the luxury end of the market is found to be slightly below the corresponding benchmark.

From Slate:

You may have heard of the idea of a “jobless recovery,” a recovery in which the economy grows but doesn’t add jobs because of structural problems or because firms are adding robots instead or whatnot. Some hot new research from Laurence Ball, Daniel Leigh, and Prakash Loungani says the problem here is there’s no such thing as a jobless recovery and the classic Okun’s Law link between GDP growth and employment is holding up fine. If recent recoveries haven’t packed much job-creating punch it’s because the recoveries have been unusually slow in terms of GDP growth as well.

I liked that paper because I recently sat through the presentation of an economics paper showing that one leading explanation for jobless recoveries—a reversal of traditional “labor hoarding” behavior patterns—is wrong and based on bad data. It turns out, in other words, that counter-cyclical productivity doesn’t explain jobless recoveries both because productivity isn’t counter-cyclical and because there are no jobless recoveries.