The Unassuming Economist

From the IMF’s latest report on Australia:

“The housing market correction is helping housing affordability. Foreign and domestic investor demand has moderated, thereby enhancing opportunities for first-time home buyers and purchases by owner-occupiers more broadly. On the supply side, progress has been made in using City Deals, agreements across all levels of government that integrate planning and infrastructure delivery for new developments and redevelopments. A prominent example―the City Deal for western Sydney―encompasses the development of the urban area around the new airport. Two states (Western Australia and Tasmania) introduced or announced housing-related tax policy measures discriminating between residents and non-residents since the last Article IV Consultation.

Housing supply reforms will remain critical to restoring housing affordability. While the housing market correction will help, it is unlikely to be sufficient for inclusive, broad-based affordability and growth. The underlying demand for housing is widely expected to remain strong with a robust economic growth outlook for and high population growth in urban areas. At the same time, broad affordability will also be a precondition for a significant reduction in related macro-financial vulnerabilities. As planning, zoning, and other reforms affect supply and prices with long lags, housing supply reforms should, therefore, not be delayed because of the housing market correction. City Deals are a useful catalyst for the large-scale development or redevelopment of urban areas. Nevertheless, this instrument has limited reach, although the Regional Deals envisaged by the government would provide for a welcome extension. Some states should still take the opportunity for further streamlining and consolidation in planning and zoning regulation.

Broader tax reforms that also address housing and land use would reinforce the impact of supply-side measures. Stamp duties should be replaced by broader land taxes, which would strengthen incentives for efficient land use. Within the context of a broader tax reform, gradual lowering of capital gains discounts and limits on negative gearing for investors would reduce structural incentives for leveraged investment by households, including in residential real estate. A more limited capital gains tax exemption for owner-occupiers should also be considered.

The housing policy measures discriminating nonresident buyers should be reconsidered. As the role of foreign buyers in residential real estate markets has started to decline, the discriminatory measures should be reconsidered, as they may no longer be needed to address housing market imbalances. They should be replaced by alternative and effective non-discriminatory measures where possible (e.g., a general surcharge on all vacant property).

The state governments of New South Wales and Victoria noted that the fall in housing prices in Sydney and Melbourne was larger than originally projected in their budgets. Nevertheless, despite their limited progress on zoning and planning reform to reduce impediments to housing supply and affordability, they expected house prices to find support from both housing demand and supply factors. The authorities highlighted that City Deals could be important tools to foster urban housing supply. City Deals have allowed all levels of government to coordinate planning and construction decisions, thereby facilitating infrastructure provision which can in turn support housing supply expansion. Deals agreed on or announced in 2018 included Darwin, Geelong, Hobart, and Perth. There are also plans underway to pilot Regional Deals outside of the major urban areas.”

 

On cross-country:

• Peter Praet: On the importance of real estate statistics – European Central Bank

On the US:

• Housing Is Already in a Slump. So It (Probably) Can’t Cause a Recession. – New York Times
• Despite contrary claims, African-Americans believe in the American dream — even millennials – American Enterprise Institute
• Oregon’s Rent Control Bill Would Ultimately Please Nobody – Cato Institute
• HUD Funding Bill Will Launch Housing Voucher Mobility Demonstration – Center on Budget and Policy Priorities
• Housing investment, sea level rise, and climate change beliefs – Economic Letters
• “Debtless” Housing Boom Leads Household Wealth Recovery – Federal Reserve Bank of St. Louis
• A Red-State Take on a YIMBY Housing Bill – Citylab
• Why Unions Must Bargain for Affordable Housing—and How – American Prospect
• Without Amazon HQ2, What Happens to Housing in Queens? – Citylab
• The Super Bowl: Key Housing Indicator – NPR
• Yet another sign from the housing market of a looming recession – HousingWire
• A Shortage of Short Sales: Explaining the Underutilization of a Foreclosure Alternative – Federal Reserve Bank of Philadelphia
• Recession not likely before 2021, housing economists say – The Orange County Register
• The Federal Shutdown Damaged Housing Voucher Programs – American Prospect

On other countries:

• [Australia] The Housing Slump Down Under Is Getting Serious – Bloomberg
• [Canada] Montreal’s Real-Estate Market Is About to Eclipse Vancouver’s – Bloomberg
• [China] The Effect of a Subway on House Prices: Evidence from Shanghai – Real Estate Economics
• [China] China Property ‘Stealth Easing’ Spreads in Boost to Home Prices – Bloomberg
• [Greece] Greece to Subsidize Mortgage Payments to Tackle Bad Loan Crisis – Bloomberg
• [China] China developers snap up distressed real estate debt – Financial Times
• [Greece] Athens property boom: Greeks left out as prices rise – BBC
• [Hong Kong] The Hong Kong property bubble that won’t burst – Financial Times
• [United Kingdom] Research reveals who made the most money from UK property – Financial Times

From the IMF’s latest report on Slovenia:

“Housing prices have completed their recovery from the deep slump during the double-dip crisis (2008–14) and continue to grow robustly, but current valuations do not point to overheating. The authorities have adopted macroprudential policy tools preemptively and continue to monitor developments. Easing supply constraints on the housing market could help to moderate future price increases.

Residential real estate prices rose at their fastest pace in 2017 since the outbreak of the crisis, recording the third highest rate in the euro area and a record number of transaction. Prices of used apartments in Ljubljana increased by 14.8 percent during 2017, compared to the national average increase of 11.8 percent. The overall housing price index rose 13.4 percent during the year to 2018: Q2.

 

 

Housing remains affordable in historical and international comparison, and further appreciation in real house prices is likely. Wages and disposable incomes have increased since 2008, while real estate prices have only just reached their pre-crisis level. By some measures, the ratio of real estate prices to incomes stood at their long-term average in 2018 (Figure 1). At 54.4 percent, Slovenia has the second-lowest urbanization rate in the EU. Continued urbanization and growth in household incomes are expected to fuel continued appreciation of real estate prices.

The supply of new residential housing has failed to keep pace with demand. The stock of housing in Slovenia is low by regional standards with 410 units per 1000 residents (compared to 547 in Austria and 524 in Croatia). The number of residential real estate transactions has been rising after 2013, yet the sales of newly-built units has dropped further from very low levels (Figure 2). The lack of supply response is related to the bankruptcy of major construction companies during the crisis years, the reluctance of banks to finance new construction, and constraints placed on new construction by urban planning and regulation.

Mortgage financing is not a significant driver of housing price developments. Slovenia has a comparatively high level of owner-occupied housing (77 percent of households, compared to 60 percent in the euro area, but comparable to other CEE countries). Only about 10 percent of households have a mortgage (19 percent in the euro area), and about a third of recent housing transactions was carried out with equity (i.e., without bank financing). The growth in mortgage lending has been positive since 2013, nearly reaching 5 percent year-on-year in 2017, but has since fallen back to below 4 percent.

The BoS has adopted macro-prudential policy tools as a preemptive step. Current data do not point to an overheating housing market or exposure by the banking sector. However, continued price increases and the inflexible supply response suggest the need for close monitoring. Guidance to banks on loan-to-value and DSTI ratios related to residential real estate transactions and a countercyclical capital buffer were implemented in 2016. In 2018, the applicability of the ratios was expanded to include not only mortgages but all household debt, prompted by rapidly growing consumer lending (albeit from a low level). Early adoption of the tools affords the banking sector time to adjust and monitor lending practices accordingly.

 

 

The government seeks to improve the supply of social housing. In 2015, Slovenia adopted its National Housing Program 2015–25 which calls for a new rental policy and an increase in social housing stock for the benefit of vulnerable groups, including young families and the elderly. The National Housing Fund, currently financing social housing investments by municipalities, could become a direct supplier, alleviating shortages of affordable housing.

Urban planning practices could be reformed to ease the supply of new housing. Zoning restrictions and the effort and time required to obtain all required permits before starting new construction projects impede the market response to rising house prices. Regulatory reform could therefore help to increase supply and slow the increases in real estate prices and rents.”

 

From the IMF’s latest report on Nepal:

“Existing macroprudential measures, including the loan-to-value ratios on car loans and residential real estate, and limits on real estate sector exposure have helped to contain credit growth, but need to be tightened further. Staff welcomes the authorities’ stated intention to
adhere to the ceiling on the loan-to-deposit (LTD) ratio—so-called credit-to-core capital cum deposit (CCD) ratio.2 Several carve-outs have been introduced over time to provide more room for credit growth. These carve-outs, including the recent decision to allow funds obtained through interbank borrowing to count as deposits, should be phased out and the authorities should resist banks’ pressures for further effective relaxation of the CCD ratio and other macroprudential rules.”

Global Housing Watch Newsletter: February 2019

In this interview, Gabriela Inchauste talks about Living and Leaving: Housing, Mobility and Welfare in the European Union—a new report from the World Bank. Inchauste is a Lead Economist in the Poverty and Equity Global Practice of the World Bank.

About the report…

Hites Ahir: What prompted you and your team to write this report?

Gabriela Inchauste: The main motivation for the report came from our concern over the growing divides in the European Union, with widening productivity gaps and growing inequality in labor incomes. The divide often plays out across regions within countries, as high-productivity jobs are concentrated in metropolitan regions. We wondered the extent to which these divides can be explained by the housing market. To the extent that households in the European Union hold most of their wealth in the form of illiquid and immovable assets such as land and housing, they can be an important source of wealth inequality and can also determine intergenerational mobility if homeowners are anchored to the localities where they live, independently of how prosperous or dynamic those locations are. This is problematic from a growth perspective because it implies that the labor force is not moving to where it can be most productive. For young people and for newcomers, housing affordability can be a real barrier to accessing good jobs, and therefore a key determinant of individual well-being and overall economic growth. Our main goal was to unravel the combined impacts of housing policies and regulations on household welfare.

Hites Ahir: What are the main findings of the report? 

Gabriela Inchauste: There are three main findings. First, the most productive metropolitan areas are precisely the places where lack of affordable housing is most acute, effectively shutting out tenants, newcomers and the youth from good job opportunities, thus limiting growth and inclusion.

Second, if higher housing prices today don’t lead to more houses built in the future, then housing affordability is more prevalent. The differences in the responsiveness of housing supply to increases in housing prices varies widely across European Union countries: those with low responsiveness have more severe housing affordability constraints. Stricter regulatory environments and weak institutions are associated with low responsiveness of housing supply to increases in housing prices.

Third, tax and spending policies across the European Union have focused on homeownership, with scarce attention and resources devoted to easing the barriers and market restrictions that could improve housing affordability and allow workers to move to where they are most productive. Housing allowances are the most progressive of interventions, particularly when directed at low-income tenants, while mortgage subsidies do not meet the housing needs of the lowest income groups.

Hites Ahir: What are the implications of your findings for policymakers?

Gabriela Inchauste: The report highlights three areas for attention. First, create enabling conditions to allow the housing supply to expand. Overly restrictive land use and development regulations constrain housing growth and drive up prices. Cities could encourage new construction or the redevelopment of existing structures by permitting appropriate floor-space ratios, building heights, and density in specific target zones. Cities can also streamline their processes to speed up land-use approval and permitting, creating a more predictable and less burdensome process. In some member states, improving property rights and the land administration system is a priority. Finally, developing governance structures that ensure efficient coordination mechanisms across financing, urban planning, infrastructure development, land-use regulation, building codes, delivery and contracting approaches is critical.

Second, use public finance more strategically. Governments should emphasize strategic investment projects in greenfield housing as a central part of their investment strategies, together with transportation to facilitate commuting to the centers of economic activity. Moreover, a shift in government spending away from tax and benefit incentives that favor homeownership in favor of tenure-neutral, portable and progressive housing allowances would improve redistribution and efficiency. Similarly, instead of incentives aimed at homeownership for the young, governments could consider providing housing allowances for targeted groups, such as the youth, potentially making benefits conditional on job search responsibilities.

Third, improve monitoring and dissemination of housing data and local-level information. Better monitoring and dissemination of information at the metropolitan level on housing prices, employment, wages, housing policies and regulations, and other indicators would help to inform policy makers. Ideally, local, regional, and national governments should create a publicly available house price registry with information on addresses, sales prices, and quality of housing (energy rating, square meters, and so on), with information as close to real time as possible, in line with other high-income countries. House purchase cost indicators could also be published to benchmark the transaction costs in place at the local, regional, and national levels. This level of transparency could lead to greater competition across jurisdictions and contribute to more efficient, and equitable housing markets.

On residential mobility …

Hites Ahir: What is the current state of mobility in the European Union?

Gabriela Inchauste: Residential mobility is low in the European Union overall compared with Canada and the United States, particularly in Central and Eastern European countries, which could limit agglomeration and increases in productivity. Residential mobility in the report is defined as a change in dwellings and does not include mobility outside their country of origin. Data on five-year residential mobility rates from European Union countries show substantial variations across countries, ranging from 1.8 percent in Romania to 45.1 percent in Sweden (Figure 1)

Across all countries, outright homeowners are the least mobile, and tenants paying market rents are the most mobile (Figure 2). Data on intention to move similarly show that residents in Central and Eastern European countries are much less likely to move, on average, than residents of other European Union member states. Notably, among countries with the lowest willingness to move, a large share of those who do intend to move were looking for opportunities abroad. This reflects the large wage differentials with major destination countries in Western Europe and may at least partly explain the lack of internal mobility. Although the decision between external and internal mobility is likely made jointly, especially in the context of free labor mobility within the European Union, we focus on internal mobility primarily because of limited information in the household surveys.

Hites Ahir: Could you discuss how do housing market regulations and institutional factors affect mobility?

Gabriela Inchauste: We estimate the extent to which country-level regulations and policies affect the likelihood of mobility. The types of policies analyzed include rental market regulations (degree of rent control and tenant protection), aggregate transaction costs, and institutional factors that affect the broad functioning of the housing market. In addition, the effect of broader policies influencing housing affordability, such as access to credit and unemployment benefits, are also assessed. We find that higher mobility is associated with lower rent control, tenant protection, and transaction costs. They are also associated with higher access to housing finance, better property rights protection, and better quality of land administration. Institutional factors (that is, weak protection of property rights and low quality of land administration) are closely linked to and negatively affect mobility because they influence the broader functioning of the market. This is an area where the policy direction is unambiguous, and Bulgaria, Croatia, Greece, and Romania could particularly benefit. Finally, we find that institutional factors disproportionately affect the mobility of younger people relative to older people. The mobility of younger people is comparable to or even lower than the mobility of older people in most European Union member countries, though with the caveat that we do not capture external migration in the data.

On policies…

Hites Ahir: In the report, you discuss three types of policies for affordable housing: schemes for home buyers or homeowners, housing allowances, and schemes for tenants. Which is the most effective and why?

Gabriela Inchauste: The report undertook a stocktaking exercise which identified a total of 208 programs across the 28 European Union member states. The resources dedicated to each type of program vary widely, with France, Germany, Ireland, the Netherlands, and the United Kingdom dedicating more resources to housing allowances, while southern and eastern European Union countries spend much more on housing development (Figure 3).

In terms of the effectiveness of different programs, we found that housing allowances are the most progressive and perhaps the most effective in improving household affordability. About 85 percent of tenant beneficiary households and 60 percent of homeowner beneficiary households on average belong to the bottom 40 percent of the income distribution across countries. However, given the relatively scarce resources devoted to these programs in many countries, a large share of poor households in the European Union still do not receive housing allowances; in fact, less than half of the poorest quintile receives housing allowances in all but 10 European Union member states.

In contrast, tax relief for home buyers and homeowners is expensive and concentrated in the top half of the distribution. In addition, there is an empirical literature that finds that mortgage interest deduction programs that are not targeted to low-income households do not actually increase homeownership but rather induce homeowners to buy larger and more expensive houses, shifting resources away from other more productive assets. Further, there is no causal evidence with respect to the existence of positive externalities associated to owning—as opposed to renting—a home. These findings raise serious doubts about the desirability of tax relief for home buyers and homeowners.

Finally, programs for tenants are less common and usually take the form of subsidies and tax relief for home developers. The stocktaking exercise identified 60 different programs for tenants across 27 European Union member states. In 14 countries these include subsidies and tax relief for housing development, and in 27 countries they included social housing. The supply of new social housing has been declining, while reduced funding for these programs has led to greater focus on targeting poorer households. However, there are some important exceptions to this, with most social housing beneficiaries belonging to the top 60 percent of the distribution in the Czech Republic and the Netherlands. Beyond programs for housing developers and social housing, there are other programs for tenants in the form of tax relief, which are found to be progressive and largely concentrated at the bottom of the distribution in Ireland and Italy, but not so in Portugal and Spain.

Hites Ahir: Of all the countries that you surveyed in this report, is there a country that gets housing right?

Gabriela Inchauste: I was especially impressed with housing policies in Ireland, where there are relatively high levels of housing affordability. Ireland has relatively low tenant protection, low transaction costs, high quality land administration and property rights protection and consequently relatively higher mobility. In terms of fiscal policy tools, Ireland has highly progressive housing allowances, to which they dedicate a relatively high share of resources. There are also social housing programs which mostly provide rental accommodation at reduced rates to low income households. Perhaps the only thing I would change is their mortgage interest tax deduction, which mostly benefits the top of the distribution.