The Unassuming Economist

From the IMF’s latest report on Hong Kong:

“During the last decade, Hong Kong SAR has experienced a large increase in house prices and credit, prompting the authorities to respond with several rounds of tightening macro-prudential rules and increasing stamp duty taxes. This chapter analyzes the effectiveness of these measures, and finds that they have helped reduce house price appreciation. The estimated impact of a 10 percent LTV tightening is a reduction of house prices of 4.8 percent over the next year. The estimated impact of a 1 percent increase in the ad valorem stamp duty tax is a reduction of house prices of 1.2 percent over the next year. Without these policies, house prices would have been 12.5 percent higher, and the mortgage credit-GDP ratio 15 percent higher.”

From a new IMF Staff Discussion Note:

“Overall income inequality has remained broadly stable in the EU over the past decade but disparities in poverty and income inequality across generations have increased markedly. Developments and drivers of overall inequality are well documented but the generational dimension of inequality has received much less attention. In Europe, real disposable incomes of the young have fallen behind those of other generations. Also, the young are facing increasing risks of poverty relative to those faced by other generations.”

“High youth unemployment has been a major source of growing youth poverty. Unemployment disproportionately affects the young. Also, there is a strong association in the data between unemployment and youth poverty. Facilitating the integration of the young into the labor market is a crucial task facing policymakers. In this regard, market-based and meritocratic institutions in general can help mitigate inequality of opportunity, offering relatively larger benefits for the young.”

“Fiscal redistribution needs to be more inclusive to better tackle youth poverty. Social protection schemes have reduced old-age poverty but they have not prevented an increase in youth poverty following the global financial crisis. Reducing youth poverty is likely to require additional resources. However, for countries with an already high level of social spending and a heavy tax burden, as well as limited fiscal space, this may not be an option. In these countries, reducing youth poverty and inequality across generations in a fiscally-neutral way may require partially rebalancing fiscal redistribution to better protect the young, while continuing to protect minimum pension assistance schemes to avoid reversing the trend decline in old-age poverty.”

Continue reading here.

Global Housing Watch Newsletter: January 2018

This post is written by Fang Yao. Fang is a Senior Analyst in the Economics Department of the Reserve Bank of New Zealand.

The housing market played a prominent role in the 2007-2009 ‘great recession’ in the United States, and housing markets in other jurisdictions have also been worryingly volatile since the turn of the century. Elevated household debt and high house prices, combined with subdued inflation outcomes, pose a challenge for both monetary and macro-prudential policy. A recent conference aimed to enhance understanding of the linkages between housing, household spending and savings (borrowing) and explore policy responses.

The conference on Housing, Household Debt and Policy took place in Wellington, and it was organized by the Reserve Bank of New Zealand on December 11-12, 2017. The organizing committee was composed by Christie Smith (Reserve Bank of New Zealand), Fang Yao (Reserve Bank of New Zealand), Robert Kirkby (Victoria University of Wellington), and Jonathan Chiu (Victoria University of Wellington and the Bank of Canada).

First day

Grant Spencer, Acting Governor of the Reserve Bank of New Zealand, provided opening remarks. His speech stressed the importance of better understanding housing and household behaviours, and in particular, using micro data analysis to inform policy decisions.

Christopher Carroll (Johns Hopkins University) then gave a keynote address on “The normal science of heterogeneous-agents macroeconomics”. Carroll questions the micro foundations of representative agent models, likening them to Ptolemaic astronomy, in which geocentric planetary motion is predicted using increasingly ad hoc geometric epicycles rather than underlying laws of motion. He encourages the integration of heterogeneous micro behavior into macro models, taking aggregation seriously, and proposes the use of micro data to test competing hypotheses about consumer behavior.

Carlos Garriga (Federal Reserve Bank of St. Louis) then presented his joint work with Aaron Hedlund (University of Missouri). Their paper analyses how arrangements in the mortgage market impact the dynamics of housing (boom-bust episodes) and the economy using a structural equilibrium model with incomplete markets and endogenous adjustment costs. In response to mortgage rates and credit conditions, the model can generate movement in house prices, residential investment, and homeownership consistent with the U.S. housing boom-bust cycle. The propagation of shocks to the macro economy is asymmetric with much higher consumption sensitivity during the bust than the boom, due to the endogenous fragility caused by mortgage debt.

Following Garriga, James Graham (New York University) discussed how household’s consumption spending responds to aggregate, regional, local and neighborhood house price shocks. Using a large panel of consumers over the period of 2004-2015, he finds that aggregate price movements are associated with the largest consumption movements, but that neighborhood-level price movements have a stronger effect than city-level price movements. He explains this empirical finding by noting that households are more likely to move across counties or neighborhoods than they are to move between cities, states, or regions. Thus, a house price increase in a particular neighborhood generates a wealth effect for households likely to move to other neighborhoods.

In the following session, Fang Yao (Reserve Bank of New Zealand) presented joint work with Jonathan Chiu (Victoria University of Wellington and the Bank of Canada), Robert Kirkby (Victoria University of Wellington), and Karam Shaar (Victoria University of Wellington). Their paper that identifies the marginal propensity to consume (MPC) out of housing wealth, using New Zealand micro data. The authors find an asymmetric interaction between the housing wealth effect and household leverage. In particular, when house prices are growing, household leverage weakens the MPC out of housing wealth. This result – that leverage weakens the marginal propensity to consume – stands in sharp contrast to Mian and Sufi (2013), who find that US consumers’ MPCs are larger when leverage is high, though in their data house prices are falling.

Fiona Price (Reserve Bank of Australia), with co-author Giancarlo La Cava (Reserve Bank of Australia), studies a related topic using Australian household micro data. Their results suggest that a ‘debt overhang channel’ may exist in Australia: higher levels of housing debt (relative to income and assets) and lower debt-servicing capacity are found to reduce growth in spending.

Dirk Krueger (University of Pennsylvania) concluded the first day with the second keynote address, titled “intergenerational redistribution in the great recession”, which presented joint work with Andrew Glover (University of Texas, Austin), Jonathan Heathcote (Federal Reserve Bank of Minneapolis), and José-Víctor Ríos-Rull (University of Pennsylvania). The Great Recession saw sharp drops in labour earnings and in asset prices. The authors construct a stochastic overlapping-generations general equilibrium model to study the welfare losses from these declines distributed across different age groups. The model predicts that the Great Recession implied modest average welfare losses for households in the 20-29 age group, stemming from poor labour market outcomes, but very large welfare losses of around 10% of lifetime consumption for households aged 60 and older, resulting from declines in asset prices.

Second day

Greg Kaplan (University of Chicago) gave the third and final keynote presentation.  His work, joint with Andreas Fuster and Basit Zafar (both Federal Reserve Bank of New York), collects and interprets new survey evidence, on households’ consumption response to hypothetical income gains. By surveying consumers about hypothetical consumption behaviour, Kaplan and co-authors can directly address a wide range of questions about the effects of changes in wealth. They find a range of interesting results, including size and sign asymmetries, little responses to news, and important liquidity effects. They further contrast these findings with theoretical models and find that the two-asset incomplete markets model of Kaplan and Violante best matches the empirical findings.

In the following session, Aaron Hedlund (University of Missouri) presented “Monetary policy, heterogeneity, and the housing channel”, in which he and co-authors Fatih Karahan (Federal Reserve Bank of New York), Kurt Mitman (Stockholm University and CEPR), and Serdar Ozkan (University of Toronto) investigate the role of housing and mortgage debt in the transmission and effectiveness of monetary policy.  They build a heterogeneous agent New Keynesian model with a frictional housing market to quantify the various mechanisms. The quantitative findings are as follows: 1) About 20% of the drop in aggregate consumption from a contractionary monetary shock is due to declining house prices; 2) Responses are asymmetric, with contractionary shocks yielding a larger response of all variables; and 3) Monetary policy is more effective in a high loan-to-value (LTV) environment.

Andrew Coleman (University of Otago) next presented work which develops a heterogeneous agent overlapping generations model that examines how the neutrality of the tax system with respect to inflation depends on the price elasticity of the housing supply. Coleman’s model, which endogenizes house prices and rents and incorporates detailed tax regulations and bank-imposed credit constraints, shows 1) Inflation has large effects on the tenure arrangements of young households irrespective of the housing supply elasticity; and 2) Inflation can improve the welfare of some low income young households if the supply is sufficiently elastic. The welfare costs of inflation are reduced by taxing real rather than nominal rates of interest.

In the first afternoon session, Patrick Moran (University of Oxford) presented “Temptation, commitment, and hand-to-mouth consumers”, joint with Agnes Kovacs (University of Oxford). This paper rationalises the existence of “wealthy hand-to-mouth” households by arguing that households are tempted to consume their liquid assets, and therefore purchase housing as a savings commitment device. A life-cycle model with non-standard preferences is able to match the empirical fraction of hand-to-mouth households and rationalises heterogeneity in the marginal propensity to consume.

Yunho Cho (University of Melbourne) and coauthors Shuyun May Li and Lawrence Uren (both at the University of Melbourne as well) explore the implications of negative gearing tax associated with housing investment by conducting a quantitative study of the Australian housing market. They find that removing the tax advantage that prompt negative gearing would result in lower house prices, as well as higher rents and homeownership rates. Their welfare analysis suggests that eliminating negative gearing would lead to an overall welfare gain of 1.5 percent for the Australian economy, with 76 percent of households becoming better off. However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young with high earnings, lose.

In the last session, Lasse Bork (Aalborg University) presented work with Stig Vinther Møller (Aarhus University) decomposing the metro-level house price variation into aggregate structural shocks and regional structural shocks. They find that regional shocks have a significant positive effects on the house prices in the metropolitan areas of California, while the aggregate counterparts were often small but nevertheless non-negligible, as seen in the historical structural decomposition of the house prices series.

Selva Baziki (Central Bank of the Republic of Turkey) presented the last paper of the conference. Her paper, co-authored with Tanju Çapacıoğlu (Central Bank of the Republic of Turkey), studies how two policy shocks to LTV ratios affected bank lending and unsecured borrowing by households, using a unique and comprehensive bank-linked individual credit data set from Turkey. They show that following the introduction of an LTV cap, banks that were previously above the limit reduced residential lending in favour of unsecured general-purpose loans to new residential borrowers and riskier commercial loans.

To sum up

The conference brought together researchers from academia and central banks, and demonstrated that there is rich and vibrant research investigating households, housing, and household indebtedness. Researchers are using sophisticated quantitative and theoretical models, and are expanding research horizons by using excellent micro data. We have learned a great deal about the drivers of housing cycles, their consequences for the real economy (in particular household spending and savings), and their implications for tax, monetary and macro-prudential policy.  The papers in this conference offer new data, new analysis, and new insights, and we hope they will inspire future research.

On climate change

• Expect Above Average Temperatures: Identifying the Economic Impacts of Climate Change – Paper
• The Impact of Weather on Local Employment: Using Big Data on Small Places – AEA
• Winter is Coming: The Long-run Effects of Climate Change on Conflict, 1400-1900 – Paper
• Regulating Mismeasured Pollution: Implications of Firm Heterogeneity for Environmental Policy – Paper
• Climate Change and Civil Unrest: Evidence From the El Niño Southern Oscillation – Paper – AEA
• Military Planning in a Context of Complex Systems and Climate Change – AEA
• Who Joined the Pigou Club? A Postmortem Analysis of Washington State’s Carbon Tax Initiative I-732 – Paper
• Decoupling Agricultural and Malarial Channels of Climate-driven Infant Mortality in Sub-Saharan Africa – AEA
• How Large is the Potential Economic Benefit of Agricultural Adaptation to Climate Change? – Paper and Presentation
• Firm and Household Responses to Climate Change Risks – AEA
• ACE – Analytic Climate Economy (with Temperature and Uncertainty) – Paper
• Expect Above Average Temperatures: Identifying the Economic Impacts of Climate Change – Paper
• Same Storm, Different Disasters: Consumer Credit Access, Income Inequality, and Natural Disaster Recovery – Paper
• Heterogeneous firms under regional temperature shocks: exit and reallocation, with evidence from Indonesia – Paper
• The Costs of Inefficient Regulation: Evidence from the Bakken – Paper
• Clean Energy Investments for New York State: An Economic Framework for Promoting Climate Stabilization and Expanding Good Job Opportunities – AEA
• Spatial Effects of Nitrogen Pollution on Drinking Water Production – Paper
• Regulating Mismeasured Pollution: Implications of Firm Heterogeneity for Environmental Policy – Paper
• Assessing the External Net Benefits of Wind Energy: The Case of Iowa’s Wind Farms – Paper
• Do HOV Lanes Save Energy? Evidence from a General Equilibrium Model of the City – Paper

On oil market

• Informing SPR Drawdown Policy through Oil Futures and Inventory Dynamics – Paper
• Measuring Leakage Risk – AEA
• How Trade-sensitive are Energy-intensive Sectors? – AEA
• Gasoline Savings From Clean Vehicle Adoption – Paper
• Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts – Paper and Presentations
• Granger Causality of Real Oil Prices After the Great Recession – Paper and Presentation
• Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? – Paper
• Evaluating a Discretionary Safety Valve: The Economic and Environmental Impacts of Waiving Fuel Content Regulations in Response to Supply Shocks – Paper

On shale gas

• Local Economic Shocks and Entrepreneurship: New Business Formation During the Shale Oil and Gas Boom – Paper
• Collateral Damage: The Impact of Shale Gas on Mortgage Lending – Paper
• The Local Effects of the Texas Shale Boom on Schools, Students, and Teachers – Paper
• Analyzing the Risk of Transporting Crude Oil by Rail – Paper
• Local Labor Market Shocks and Wage Differentials: Evidence From Shale Oil and Gas Booms – Paper

On carbon market

• Lessons From China’s Seven Regional Carbon Market Pilots – AEA
• China’s Rate-Based Approach to Reducing CO2 Emissions: Strengths, Limitations, and Alternatives – Paper
• Design Issues in China’s National Carbon Market – Paper
• Who Joined the Pigou Club? A Postmortem Analysis of Washington State’s Carbon Tax Initiative I-732 – Paper
• Do Carbon Taxes Kill Jobs? New Heterogeneous Evidence from British Columbia – Paper
• Emissions Containment in Response to Carbon Market Prices – Paper and Presentation
• Pigou Creates Losers: On the Impossibility of Pareto Improvements From Pigouvian Taxes – AEA

On solar energy

• Pass-Through as a Test for Market Power: An Application to Solar Subsidies – Paper
• What Drives Social Contagion in the Adoption of Solar Photovoltaic Technology? – Paper
• What Drives Social Contagion in the Adoption of Solar Photovoltaic Technology? – Paper
• Siting Solar PV Capacity to Maximize Environmental Benefits – Paper

On electricity

• What’s killing nuclear power in U.S. electricity markets? Drivers of wholesale price declines at nuclear generators in the PJM Interconnection – Paper and Presentation
• Who Pays In Deregulated Electricity Markets? – Paper
• Determinants of the Cost of Electricity Supply in India – AEA

On vehicle market

• Self-Driving Cars and the City: Long-Run Effects on Land Use, Welfare, and the Environment – Paper
• Attribute Substitution in Household Vehicle Portfolios – Paper
• Mind the Gap! Tax Incentives and Incentives for Manipulating Fuel Efficiency in the Automobile Industry – AEA
• Does an Energy Efficiency Gap Exist in the Light-duty Vehicle Market? Evidence From Fuel-saving Technology Adoption – Paper

On cross-country:

• Comparative Analysis of Newly-Built Housing Quality in Poland and Lithuania – De Gruyter

On the US:

• The Hazards of Concentrating Wealth in Homeownership – Federal Reserve Bank of St. Louis
• A Bad Start on Reforming Fannie and Freddie – Bloomberg
• The Corrupt Politics of Low-Income Housing – Reason
• Fannie Mae will ease financial standards for mortgage applicants next month – Washington Post
• How the latest affordable housing policy benefits homeowners and realtors, not first-time buyers – American Enterprise Institute
• The Great Urban Housing Solution That Has No Good Name – The Atlantic
• Remodeling Market to March Higher in 2018 – Harvard Joint Center for Housing Studies

On other countries:

• [China] Housing market sentiment and intervention effectiveness: Evidence from China – Emerging Markets Review
• [China] Is there a housing bubble in China? – Sun Yat-sen University, Guangzhou
• [China] China’s Hot Housing Market Begins to Cool – Wall Street Journal
• [Czech Republic] Who actually decides? Parental influence on the housing tenure choice of their children – The Czech Academy of Sciences
• [Iceland] Discrimination in the Housing Market as an Impediment to European Labour Force Integration: The Case of Iceland – Lund University
• [India] India’s property slowdown puts developers in crosshairs – Financial Times
• [Italy] Matching and Credit Conditions: Evidence from the Italian Housing Market Survey – Luiss Lab of European Economics
• [Singapore] Curb Your Enthusiasm for Singapore Property – Bloomberg
• [United Kingdom] Why Britain’s buy-to-let boom is over – Economist
• [United Kingdom] Housing in London: Addressing the Supply Crisis – London School of Economics
• [United Kingdom] What will happen to house prices in 2018? – Financial Times
• [United Kingdom] Divorce, Separation, and Housing Changes: A Multiprocess Analysis of Longitudinal Data from England and Wales – Demography

Photo by Aliis Sinisalu