The Unassuming Economist

From IMF’s Global Financial Stability Report – April 2018:

“House price dispersion can be used as a proxy for demand from high-net-worth foreign investors with a preference for luxury housing. Using granular data from the US housing market, this box finds that house price dispersion in the United States has increased sharply over recent decades, and it increases when house prices in alternative investment destinations outside the United States rise. Both findings point to global investors contributing to house price synchronicity across cities and countries.”

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From IMFBlog:

“If house prices are rising in Tokyo, are they also going up in London?

Increasingly, the answer is yes.

In recent decades, house prices around the world have shown a growing tendency to move in the same direction at the same time. What accounts for this phenomenon, and what are the implications for the world economy? These are questions that IMF economists explore in Chapter 3 of the latest Global Financial Stability Report.

Our study of 44 cities and 40 advanced and emerging-market economies shows that the growing integration of financial markets plays an important role. As a result, housing markets in one country are more sensitive to swings in another. Policy makers should pay attention, because the heightened tendency for house prices to move in tandem may signal greater odds of an economic slowdown.  An economic shock in one part of the world is more likely to affect housing markets elsewhere.

 

Let’s look at why home prices are more synchronized in a financially integrated world.

• Interest rates: The world’s major central banks have kept interest rates unusually low for a long time in a bid to stimulate growth. That has produced a ripple effect of low borrowing costs, including cheap mortgages, across the globe, which has helped push up prices.
• Institutional investors , private equity firms, and Real Estate Investment Trusts have been increasingly active in major cities such as Amsterdam, Sydney, and Vancouver as they seek out higher returns.
• Wealthy individuals have also snapped up properties in major financial centers in search of safe places to invest their money (and perhaps to live). One result: because the wealthy prefer high-end properties, their investments push up prices in expensive neighborhoods in places like New York and London at the same time.
• Economic growth: In addition to financial factors, coordinated movements in the real economy contribute to the phenomenon. In 2017, growth picked up in 120 economies, accounting for three-quarters of world GDP. It was the broadest synchronized growth surge since 2010. Economic growth is a major driver of demand for homes, and hence prices.

All of this suggests that house prices are starting to behave more like the prices of financial assets, such as stocks and bonds, which are influenced by investors elsewhere in the world. In countries that are more open to global capital flows, prices of both homes and equities tend to be more synchronized with global markets.”

Continue reading here. 

On cross-country:

• European Mortgage Markets Quarterly Review – European Covered Bond Council
• Singapore’s private-public housing mix could offer solutions for Toronto and Vancouver – The Globe and Mail
• Financial cycles in euro area economies: a cross-country perspective – Deutsche Bundesbank

On the US:

• Quantities and Prices during the Housing Bust – Federal Reserve Bank of New York
• Characteristics of Domestic Cross-Metropolitan Migrants – BuildZoom
• San Diego’s Mexican property market at risk from Trump tariffs – Financial Times
• House Price Markups and Mortgage Defaults – Federal Housing Finance Agency
• Case-Shiller – A surprise in the bottom 3 cities – Real Estate Decoded
• The Unfulfilled Promise of Fair Housing – The Atlantic
• Housing Wealth, Health and Deaths of Despair – IESE Business School
• Nearly two-thirds of renters say they can’t afford to buy a home – Wall Street Journal

On other countries:

• [Botswana] Housing delivery to the low income in Botswana – Emerald Insight
• [China] Housing conditions and life satisfaction in urban China – Cities
• [China] Accounting for China’s real estate boom – Financial Times
• [China] Macro-economic index effect on house prices in China – Universiti Teknologi Malaysia
• [China] Has Monetary Policy Caused Housing Price to Rise or Fall in China? – The Singapore Economic Review
• [China] Exploring the relationship between urban land supply and housing stock: Evidence from 35 cities in China – Habitat International
• [France] Taxing Vacant Dwellings: Can fiscal policy reduce vacancy? – RePec
• [Hong Kong] The impact of government housing policy and development controls on the dynamics of Hong Kong’s residential property market – The Hong Kong Polytechnic University
• [Italy] Average Time to Sell a Property and Credit Conditions: Evidence from the Italian Housing Market Survey – LUISS Guido Carli
• [Vietnam] Vietnam’s rapid growth fuels Ho Chi Minh property boom – Financial Times

Photo by Aliis Sinisalu

The IMF’s latest report on Mongolia says that “(…) housing prices stabilized after years of deflation, in line with stronger economic activity and household lending.”

From the IMF’s latest report on Luxembourg:

“Demand for housing has exceeded supply for many years. While house prices are in line with fundamentals, they have risen faster than disposable income for years, largely because of structural supply constraints in the context of strong demand, in part reflecting net demographic growth. The dynamics of house prices is also somewhat affected by cyclical factors such as the cost of construction and to some extent the low interest rate environment. Rigid zoning and administrative rules together with land hoarding prevent sufficient construction, while tax incentives and subsidies fuel demand. Reduced affordability has driven up household indebtedness, in particular among younger households.

Risks in the real estate market should continue to be closely monitored, and further actions taken as needed. Recent measures have appropriately built capital buffers in the banking system while discouraging riskier lending. However, household debt is relatively high and limits to debt-service-to-income ratios should be set if house prices continue to outpace disposable incomes. Going forward, the normalization of interest rates could add to the debt service of some households (who borrowed at variable rates) while banks’ margins on their stock of fixed rate mortgages would shrink.

Containing house price pressures and alleviating bottlenecks of housing require a strong effort to expand the stock of housing:

• Excessive red tape in bringing additional land to construction should be pruned, and incentives strengthened. The initiatives of Baulücken for new construction are a step in the right direction;
• Local zoning decisions should be better coordinated with a national spatial development plan and cooperation among municipalities should be encouraged;
• Existing tools to mobilize vacant land and unoccupied dwellings could be strengthened. This includes implementing taxation on vacant lots. In this respect, the initiative of Baulandvertrag goes in the right direction;
• In the PDAT and the municipal implementation, assigning “mixed construction” land in priority to residential real estate would widen the share of land eligible for housing development;
• Tax biases at the municipality level against residential real estate should be reduced further. The reform of the distribution of municipal business taxes among municipalities is a step in the right direction as it reduces incentives favoring commercial over residential real estate zoning decisions. Going forward, policies should increase the share of the ICC redistributed in the equalization fund;
• Increasing property taxes and revising cadastral values would help municipalities increase own resources.

The share of social and affordable housing in total housing could be increased:

• To encourage social housing in the rental segment, public developers in the social sector (FSH, SNCHM, and municipalities) should be gradually steered only towards the development and management of social rentals. This would help clarify management roles and separate more clearly the rental activity from the construction-for-sale business.”