The Unassuming Economist

From IMF’s latest report on Denmark:

“The housing market plays a vital role in Denmark, reinforcing macro-financial linkages. High mandatory pension contributions and household savings have created a pension system that has facilitated the development of the world’s largest covered bond market in percent of GDP. Insurance companies, pension funds, and foreign investors are among the largest holders of covered bonds, which are issued by MCIs to fund household mortgages (…).  Thus, housing asset exposures interlink MCIs, pension funds, insurance, foreign investors, and the household sector. Hence, shocks to real estate may impact negatively households’ financial and non-financial assets, hindering consumption; thus, reinforcing macro-financial linkages (SIP 2018).

High household leverage amid high house valuations remains a key source of macrofinancial vulnerability. High house prices, a favorable tax treatment, and easy access to low-cost borrowing incentivize the funding of housing with large mortgages. These factors explain why Danish households’ debt-to-income ratios are among the highest in advanced economies. Large liabilities are counterbalanced by large assets (housing and pension). However, high gross debt, combined with illiquid assets (concentrated in real estate) expose households to price and interest rate shocks that can impact asymmetrically their balance sheet. Two types of households appear particularly vulnerable. Households who have purchased in potentially overvalued urban areas (SIP 2018), where loan-to-income (LTI) ratios and credit growth are higher than anywhere else. And low-income households who spend a significant share of their income on housing. These vulnerabilities are compounded by the large proportion of variable-rate and interest-only mortgages in the system (…).

Recent developments are encouraging but further action is needed. Staff welcomes the comprehensive suite of policies that have been implemented in recent years. These include policies targeting households and financial intermediaries in the form of macroprudential policies (SIP 2018), supervisory guidance for MCIs and banks, and a reform of property taxation (IMF 2017). While overall house prices are softening and households are switching to loans with higher amortization and lower interest rate risk, staff advocates further deployment of coordinated policies to address remaining vulnerabilities.

Macroprudential instruments. In an economy with elevated house prices, rules targeting loan-to-value (LTVs) become less binding. Thus, increased focus on income-based measures, including debt-to-income (DTI), loan-to-income (LTI) and debt-service-to-income (DSTI) might prove more effective in addressing high leverage and encourage faster amortization. Staff welcomes rules implemented in 2018 to limit lending via interest-only and floating-rate mortgages to highly-indebted households.21 However, authorities could strengthen DTI restrictions for all loans, irrespective of their loan-to-value ratios. Tighter limits on income based measures for interest-only and adjustable-rate mortgages should also be considered, while calibrating limits to these measures for lower risk groups—first-time home buyers and low-levered households—and where financing is via fixed–rate mortgages.22 Highly-leveraged households—with debt-to-income above 400 percent—should be subject to mandatory amortization, irrespective of amortization periods (SIP 2018).

Macroprudential framework. A review of the efficacy of policy implementation is encouraged, including a review of institutional arrangements (…). The process followed by the SRC to arrive at a recommendation can take too long, potentially hindering implementation. Given that the decision-making power lies with the government, there is a risk that political considerations could delay the consensus process that tends to form the basis of such recommendations (FSAP 2014). Experience from other countries indicates that improvements in timeliness can be achieved by assigning independent authorities a macroprudential mandate which includes legal powers to implement macroprudential policy with corresponding transparency and accountability requirements.

Tax policy. Tax treatment of owneroccupied housing is very favorable compared to other savings vehicles and most OECD countries.  MID should be reduced further, taking advantage of the current low rate environment. To incentivize homeowners to swap risky mortgages, MID could be made conditional on amortizing and/or fixed rate mortgages. Balancing tax incentives for pension contributions could release resources for larger down-payments; thereby reducing household leverage.

Housing supply. Rent controls in Denmark, among the highest in advanced economies, should be reduced to stimulate the rental market, while protecting the interest of the most vulnerable. Restrictions on the size of new apartments should be relaxed in urban areas to improve demand-supply mismatches. Upgrading of public transportation could relieve house price pressures around fast growing urban centers. Streamlined zoning and planning procedures across municipalities could increase supply, thereby alleviating price pressures.

Authorities agree that macro-financial risks stemming from the interaction between high household leverage and high house valuations should be followed closely. Authorities indicate that household resilience to interest rate increases likely improved as more homeowners continue shifting towards fixed rate mortgages and longer fixing periods. They also welcome the recent softening in apartment prices. The authorities argue that additional measures would require further analysis of the effects on the housing market and the overall economy. Authorities see the macroprudential framework as well functioning including the timeframe for the CCyB implementation and SRC’s independence. The DN notes that the long-term success of the framework depends on policy-makers’ continued implementation of the SRC’s recommendations.”

On cross-country:

• Hot Property: The Housing Market in Major Cities – SpringerLink
• Q1 2019: Continued strong house price rises in Europe and Asia-Pacific, but globally housing markets are slowing – Global Property Guide
• Summer 2019 Issue – Real Estate Economics
• The Housing Cycle: What Role for Mortgage Market Development and Housing Finance? – Journal of Real Estate Finance & Economics
• Real estate: post-crisis boom draws to a close – Financial Times
• Investors Are Buying More of the U.S. Housing Market Than Ever Before – Wall Street Journal

On the US:

• Why Housing Policy Feels Like Generational Warfare – The Atlantic
• Cities Start to Question an American Ideal: A House With a Yard on Every Lot – New York Times
• Land Use Regulation and Housing Prices – University of Pennsylvania
• New York property barons lose grip on state politics – Financial Times
• Roy on Resegregation and Other Roots of the Housing Crisis – UCLA
• Will Fannie and Freddie get a new sibling? – MarketWatch
• Los Angeles Is in Crisis. So Why Isn’t It Building More Housing? – The Atlantic
• On Rent Subsidies and Affordable Housing – Wall Street Journal
• Is America Finally Waking Up to Its Government-Created Housing Crisis? – Reason
• Minimum Wage Still Can’t Pay for a Two-Bedroom Apartment Anywhere – Citylab

On other countries:

• [Australia] Understanding Rising Housing Loan Arrears – Reserve Bank of Australia
• [Ireland] ESRI urges more aggressive site tax to spur housing supply – The Irish Times
• [Lithuania] Lithuania’s modest house price rises – Global Property Guide
• [Mexico] Mexico’s housing market is strengthening – Global Property Guide
• [Netherlands] Netherlands’ house prices continue to rise, albeit at slower pace – Global Property Guide
• [Norway] Norway’s housing market is losing steam – Global Property Guide
• [Singapore] Singapore’s house price growth slowing again – Global Property Guide
• [Spain] Spain’s housing market remains healthy – Global Property Guide
• [Spain] Spain Is Latest Battleground for Global Affordable Housing – Bloomberg
• [Taiwan] Taiwan’s housing market improving – Global Property Guide

This chapter describes the evolution of IMF monitoring—“surveillance” in the IMF’s jargon—of housing markets from 2008 to the present. It explains how the IMF has assessed overvaluation in housing markets and the advice offered on the policy tools needed to manage house price booms. The IMF’s ‘corporate view’ or ‘house view’ that macroprudential policies must be the first line of defense to deal with house price booms is laid out. The chapter also discusses whether the run-up in house prices over the past few years should be a source of worry. Lastly, the chapter describes how IMF surveillance has adapted as housing markets have become more ‘glocalized’ and developments at the sub-national level gain greater prominence.

In April 2008, the IMF’s flagship publication World Economic Outlook provided estimates of overvaluation in house prices for a group of advanced economies. Though house prices had fallen in the United States in the preceding years, they had continued to rise in many other countries. The IMF’s analysis suggested that, with only a few exceptions, house prices were overvalued by between 10% and 30%, as shown by the bars in Fig. 7.1. The dots show the decline in house prices that occurred over the subsequent 4 years. In many countries where the IMF had assessed house prices to be overvalued, house prices did indeed fall quite significantly—these cases include Denmark, Ireland, the Netherlands and the United Kingdom.

Fast forward to the present: The IMF’s Global House Price Index—a simple average of real house prices for 57 countries—is now back to its level before the global financial crisis (GFC). The index has been inching up since 2012, making the duration of the run-up comparable to one in 2001–06 that ended in house price collapses in many countries. Is it time to worry again about overvaluation?

Read the rest of chapter here and the book here.

From the IMF’s latest report on Ireland:

“Unlike during the pre-crisis period, rising housing prices have not been fueled by excessive credit but rather by a lagging supply response to rising demand. Robust job creation, rising wages, low interest rates, and population growth have all contributed to a strong recovery in housing demand since 2013. The supply of housing, however, has not kept pace. The main factors that have prevented a faster expansion in housing supply are constraining regulations, weaknesses in the zoning and planning process, financial difficulties of construction firms, skills shortages in the construction sector, and land hoarding.

The government has taken several measures to increase housing supply, develop the rental market, and improve affordability.1 The Rebuilding Ireland Action Plan for Housing and Homelessness, announced in July 2016, seeks to double the annual level of residential construction to 25,000 homes by 2020, deliver an additional 50,000 social housing units in the period to 2021, and meet the housing needs of an additional 87,000 households through housing assistance schemes. Home Building Finance Ireland, a newly established state lender for financially constrained developers, aims to deliver up to 7,500 new homes over the next five years, financed by a €750 million investment from the Ireland Strategic Investment Fund. Other initiatives include an infrastructure fund designed to provide local public infrastructure to facilitate housing development, and a new fast-track planning process for large-scale housing developments.

There are indications that the housing supply will continue to expand. The number of new dwellings connected to the electric grid increased by 17 percent in 2018—the fifth consecutive year of growth, albeit from a low base—while new dwelling completions have also grown rapidly. Forward-looking indicators point to further growth. Building permits granted for the construction of houses and apartments increased by 8.5 percent year-on-year in 2018:Q3, and employment continues to increase in the construction sector.”

 

From the IMF’s latest report on Czech Republic:

“The housing market remains pressured.

Despite a recent deceleration, house price growth was still among the 5 highest in the EU in 2018, outpacing wage and income growth (Figure 7). In Prague, where most property transactions take place, offered prices for apartments have increased by 44 percent in the three years from 2016 to 2018. The price-to-income ratio has increased by a cumulative 12.6 percent between 2015: Q4 and 2018: Q4, after having been stable over the preceding 5 years. House price increases have also made a substantial contribution to the measure of CPI targeted by the CNB.

Private nonfinancial sector credit accelerated from the previous year, growing ahead of nominal incomes. This was driven primarily by mortgage credit, which continues to grow at a high rate (…). But new mortgage volumes are decreasing amid increasing lending rates and tighter macroprudential borrower recommendations. Nonfinancial corporate lending growth also increased in 2018.”