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Friday, June 19, 2015

Fiscal Forecasting Follies: Private Sector vs. Government

Government forecasts of budget deficits invoke considerable skepticism. A prominent critic is Jeff Frankel who mocks the ‘‘budgetary wishful thinking’’ of many government agencies. Frankel notes that during the 2000s, the U.S. Office of Management and Budget ‘‘turned out optimistic forecasts’’ for eight years in a row; likewise, in 2000, the Greek government projected that its budget deficits would shrink below 2 percent of GDP within a year, a far cry from the outcome of 4–5 percent of GDP. Such examples have tended to be the rule rather than the exception. Private sector forecasters are presumably less subject to the political pressures that governments face. How well do they do? My new paper with Joao Jalles and Iskandar Karibzhanov presents evidence on the quality of private sector fiscal forecasts.

 

Government forecasts of budget deficits invoke considerable skepticism. A prominent critic is Jeff Frankel who mocks the ‘‘budgetary wishful thinking’’ of many government agencies. Frankel notes that during the 2000s, the U.S. Office of Management and Budget ‘‘turned out optimistic forecasts’’ for eight years in a row; likewise, in 2000, the Greek government projected that its budget deficits would shrink below 2 percent of GDP within a year, a far cry from the outcome of 4–5 percent of GDP. Read the full article…

Posted by Prakash Loungani at 2:44 PM

Labels: Forecasting Forum

Wednesday, June 10, 2015

Housing Finance and Real-Estate Booms: A Cross-Country Perspective

A new IMF paper “analyzes the conflict between the objective of increasing access to housing finance and the dangers associated with fast-growing housing credit. [The paper finds the following:] First, housing finance characteristics vary widely across countries, and several characteristics are correlated with the relative depth of mortgage markets. (…) Second, some of the housing finance characteristics associated with deeper mortgage markets are also associated with increased risks of crisis. (…) Third, in this context, both advanced and emerging markets should avoid relaxing house financing standards in order to achieve deeper mortgage markets, and focus first on doing so through improving institutions (for example, legal rights) and the macroeconomic environment. Fourth, macroprudential policies, and in particular housing finance regulation, should be the first line of defense for handling mortgage market booms, as their narrow focus gives them an advantage over monetary policy. However, their effectiveness beyond the short run has yet to be proven. Fifth, the role of monetary policy in addressing house-related credit booms should not always be downplayed. Despite the absence of important inflation pressures, about 60 percent of the identified past real-estate booms occurred as a result of, or at the same time as, rapid economic growth and broad high credit growth in the economy. Monetary policy would be a necessary complement of macroprudential measures in those cases. Finally, dealing effectively with real-estate booms requires a broad mix of policies. Macroprudential and monetary policies are key ingredients, but fiscal incentives and house supply considerations are structural country-specific elements that may bear heavily on the probability of booms occurring and the potential costs of a bust.”

A new IMF paper “analyzes the conflict between the objective of increasing access to housing finance and the dangers associated with fast-growing housing credit. [The paper finds the following:] First, housing finance characteristics vary widely across countries, and several characteristics are correlated with the relative depth of mortgage markets. (…) Second, some of the housing finance characteristics associated with deeper mortgage markets are also associated with increased risks of crisis. (…) Third, in this context, both advanced and emerging markets should avoid relaxing house financing standards in order to achieve deeper mortgage markets, Read the full article…

Posted by Prakash Loungani at 5:43 PM

Labels: Global Housing Watch

Monday, June 8, 2015

House Prices in Colombia

“Housing prices have increased rapidly in recent years, raising concerns that the market may be undergoing a bubble. House prices have nearly doubled in real terms over the last decade, equally for subsidized and commercial housing, and are almost 40 percent above their peak in 1996. The price hikes have outstripped increases in construction prices and were mainly driven by a rising trend in the capital and two other large cities. However, the increase in housing prices has been less pronounced after adjusted for income levels and the quality of newly constructed housing. House price increases have also surpassed rental increases (…). However, household income has also increased strongly in the recent decade, alleviating the burden of mortgages on households and boosting demand for housing,” says the latest IMF report on Colombia.

Moreover, the report says that: “The exposure of households and the financial sector to house price developments continues to be low (…). The growth of mortgages in banks’ loan portfolios remains high, although it has slowed marginally to 17.3 percent in real terms in September 2014. Credit risks are, however, mitigated by a low overall stock of mortgages (about 10.5 percent of total loans), conservative provisioning, and lower housing finance interest rates, which are capped to the lowest rates prevailing for other type of lending. Banks have also been moving towards greater amounts of fixed rate funding for mortgages from variable rates, which should strengthen profitability in a low interest rate environment. Moreover, housing loans extended in recent years have shown less deterioration compared to those made in the past. At 17.5 percent of GDP and 28 percent of disposable income, household debt is moderate, and debt service-to-disposable income is low (9 percent). Although slightly higher than a year ago, LTVs remain low (52 percent).”

“Housing prices have increased rapidly in recent years, raising concerns that the market may be undergoing a bubble. House prices have nearly doubled in real terms over the last decade, equally for subsidized and commercial housing, and are almost 40 percent above their peak in 1996. The price hikes have outstripped increases in construction prices and were mainly driven by a rising trend in the capital and two other large cities. However, the increase in housing prices has been less pronounced after adjusted for income levels and the quality of newly constructed housing. Read the full article…

Posted by Prakash Loungani at 6:56 PM

Labels: Global Housing Watch

House Prices in Luxembourg

“(…) there is some risk that a protracted period of low interest rates could spawn a credit fueled housing bubble (…). Credit to households has been growing by about 7 percent y/y, yet household debt seems managable (data vary by source). If a bubble were to develop, housing prices could correct, compressing household consumption or triggering defaults and possibly disrupting credit to the economy. With rising housing prices spanning decades, reflecting population and job growth combined with zoning and other rules that constrain supply, there seems no immediate reason to expect a correction, although pockets of risk are possible,” according to the IMF’s new report on Luxembourg.

The report also says that “Growth in the housing exposures of locally active banks warrants continued monitoring and readiness to deploy additional macroprudential tools if needed. Housing prices and mortgage lending continue to rise, raising concentration risks. Some households could become overstretched. In late 2012, the CSSF took positive steps to dampen these risks, advising banks to limit loan-to-value (LTV) ratios to 80 percent and imposing higher risk weights on mortgages with higher LTV ratios. Staff advised the authorities to step up data collection on property lending, and to prepare appropriately targeted macroprudential tools for deployment if needed.”

“(…) there is some risk that a protracted period of low interest rates could spawn a credit fueled housing bubble (…). Credit to households has been growing by about 7 percent y/y, yet household debt seems managable (data vary by source). If a bubble were to develop, housing prices could correct, compressing household consumption or triggering defaults and possibly disrupting credit to the economy. With rising housing prices spanning decades, reflecting population and job growth combined with zoning and other rules that constrain supply, Read the full article…

Posted by Prakash Loungani at 5:54 PM

Labels: Global Housing Watch

Saturday, May 30, 2015

House Prices in Peru

“There are no signs of asset price bubbles. (…) Housing prices continued to increase, but there is no evidence of misalignment from the trend average and the housing price-to-rent ratio was 15 percent―one of the lowest in the region,” according to IMF’s latest report on Peru.

“There are no signs of asset price bubbles. (…) Housing prices continued to increase, but there is no evidence of misalignment from the trend average and the housing price-to-rent ratio was 15 percent―one of the lowest in the region,” according to IMF’s latest report on Peru.

Read the full article…

Posted by Prakash Loungani at 6:34 PM

Labels: Global Housing Watch

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