The Unassuming Economist

From the latest IMF’s report on Korea:

“Macroprudential policies are being extensively used to curb risks from high household debt and credit growth. A broad range of macroprudential instruments that have been tightened and new ones introduced (Table 2). The loan-to-value (LTV) and debt-to-income (DTI) ratios were reduced to record lows of 40 percent, and are now well below recent highs of 70 and 60 percent, respectively, to which they were increased in August 2014. And, a lower level of 30 percent was set for borrowers with multiple mortgages and in designated regions of speculative activity, mostly around Seoul. In October 2017, the DTI was effectively tightened further by broadening the range of debt subject to it. Also announced is a new, debt service ratio (DSR) with comprehensive coverage of all household debts, which will be implemented for banks in mid-2018; and then for NBFIs at the start of 2019.

Evidence suggests that this macroprudential tightening will be effective. The growth in credit to households has slowed significantly over the last few months. Moreover, speculative purchases of apartments before construction is has diminished. An event study analysis by Federal Reserve Board economists finds that hikes in LTVs and DTIs have been effective in slowing credit growth and housing price increases. New cross-country panel regression analysis show that use of LTVs and DTIs is effective in reducing real household credit growth across 34 advanced and emerging market economies, including Korea.”

 

From the IMF’s latest report on UK:

“Barriers to labor mobility may reduce its effectiveness as a regional adjustment mechanism. Migration of workers from poor, low-productivity areas to rich and highly productive ones is an important channel through which cross-region convergence may be achieved. Factors distorting internal labor flows are potentially relevant determinants of regional disparities in income and productivity. Indeed, the pattern of internal flows for England and Wales shows that highly productive regions tend to have net outflows instead of inflows. This suggests that factors other than labor market conditions (i.e. productivity differentials) are likely significant determinants of internal migration patterns in the UK.

Housing prices (and regulations) have a significant impact on internal migration patterns in the UK. Analysis of bilateral gross flows between regions in England and Wales shows that house prices are negatively related to workers’ movement from one region to another (Box 1). Results are in line with Biswas et al. (2009), who study inter-regional migration in England, Wales, Scotland and Northern Ireland, and Rabe and Taylor (2010), who analyze internal migration flows using household-level data for 11 regions in the UK. In turn, Hilber and Vermeulen (2015) show that housing prices are significantly (causally) affected by housing regulations. The impact is economically large: if the South East (the most regulated English region) had the regulatory restrictiveness of the North East, house prices in the South East would have been roughly 25 percent lower in 2008.

Evidence also suggests that local housing regulatory constraints have affected income convergence across regions. Data on local housing regulatory restrictions for 46 English counties is used to test whether housing restrictions have affected interregional convergence in the UK. The specification, following Ganong and Shoag (2015), models the change in workers’ real earnings between 1979 and 2008 as a function of its starting level in 1979, a measure of severity of housing restrictions in the same period from Hilber and Vermeulen (2015), and an interaction term of the two variables (Table 1). The coefficient on the starting level of earnings is significant and negative, suggesting income convergence between counties with low initial earnings and counties with a high starting level of earnings. The interaction term of earnings and housing regulations is highly significant and positive, indicating a dampening effect of tighter housing regulations on the speed of convergence across counties. To the extent that earnings are correlated with productivity, housing restrictions have likely contributed to differences in productivity across regions as well.

Policy measures to promote housing supply may therefore have a positive impact on labor mobility and growth. Regulatory constraints tend to be higher and more binding in more developed and productive areas (see Hilber and Robert-Nicoud 2013). Evidence from the US suggests that lowering regulatory constraints in the more productive cities would favor a more efficient allocation of labor and have an economically significant effect on growth (Hsieh and Moretti 2017). Efforts should continue to further boost housing supply, including by easing planning restrictions, mobilizing unused publicly-owned lands for construction, and providing incentives for local authorities to facilitate residential development (Hilber 2015, IMF 2016, and OECD 2017).”

On cross-country:

• Property still beats a pension, say retirement savers – Financial Times
• A Driverless Future Threatens the Laws of Real Estate – Bloomberg
• Yes to Affordable Housing in My Backyard – Project Syndicate

On the US:

• Booming Home Prices Spur Spending on Public Education – NBER
• America’s New Metropolitan Landscape: Pockets Of Dense Construction In A Dormant Suburban Interior – BuildZoom
• Is Rent Growth Finally Slowing? – Harvard Joint Center for Housing Studies
• America’s Other Housing Crisis: Undercrowded Suburbs – The Atlantic
• The Affordable Housing Crisis Is About to Get Worse – New York Times
• Navigating the Turbulent Economic Waters of the 2007 Great Recession and the Crash of the Housing Market – University of South Florida
• The Towers Came Down, and With Them the Promise of Public Housing – New York Times Magazine
• The Impact of TOM on Prices in the US Housing Market – The Journal of Real Estate Finance and Economics
• A Bid to Solve California’s Housing Crisis Could Redraw How Cities Grow – Wired
• Tech Wealth Turns Attention to Affordable Housing in Seattle – Wall Street Journal

On other countries:

• [Canada] Canadian mortgages held by foreigners grow, says housing agency – Reuters
• [Canada] Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment – Bank of Canada
• [Canada] New CMHC study sheds light on rising house prices – CMHC
• [Canada] Canada’s housing market flirts with disaster – Financial Times
• [China] Beyond homeownership: Housing conditions, housing support and rural migrant urban settlement intentions in China – Cities
• [China] China developers retreat from Hong Kong property market – Financial Times
• [Germany] Demographic Changes and House Prices: A case study of the German Detached Houses – Journal of Regional & Socio-Economic Issues
• [Nigeria] Sub-standard housing and slum clearance in developing countries: A case study of Nigeria – Habitat International
• [Norway] Can monetary policy revive the housing market in a crisis? Evidence from high-resolution data on Norwegian transactions – Journal of Housing Economics
• [South Africa] Drought Dulls Thirst for Some of Africa’s Most Expensive Homes – Bloomberg
• [Sweden] Banks Pile Into Sweden’s Housing Market – Bloomberg
• [Turkey] Determinants of Residential Real Estate Prices in Turkey – European Journal of Business and Social Sciences
• [United Kingdom] UK house prices: Looking far into the past and into the future – VOX
• [United Kingdom] A Day of Reckoning for UK Housing – New Economics Foundation
• [United Kingdom] Sellers accept big discounts on top-end London property – Financial Times

Photo by Aliis Sinisalu

From the IMF’s latest report on Malta:

“Strong momentum in the housing market may increase financial stability risks. Household balance sheets are generally sound with a low default rate and financial wealth exceeding peer levels. However, given the high exposure of core domestic banks to property-related loans, a sharp drop in house prices or increases in interest rates may lead to a negative spiral of low lending and investment and adverse macro-financial repercussions. Future unwinding of real estate investments by successful IIP applicants may also put downward pressure on housing prices. While staff does not see immediate financial stability risks, persistent strength in mortgage lending and sustained demand for properties without a corresponding increase in household income could lead to significant imbalances. Staff’s analysis—although subject to uncertainty—indicates that housing prices have entered a modest overvaluation territory by several metrics (Annex IV). Moreover, about 80 percent of the respondents to a recent central bank’s survey viewed residential properties as overpriced in 2016.

 

 

Steps to pre-empt a potential buildup of risks in the housing market are therefore warranted, including by:

• Deploying targeted macro-prudential limits for mortgages (e.g. limits on loan-to-value and debt service-to-income ratios) to enhance the resilience of bank and household balance sheets to a possible sharp reversal in market conditions. Closing the remaining data gaps on borrower characteristics would help calibrating these measures effectively.
• Ensuring that fiscal incentives do not amplify the housing cycle by aligning the tax rate on rental income with the tax rates on other sources of income. Introducing periodic reviews of the scope and parameters of the IIP, including the minimum real estate investment or leasing values, could help curb housing demand and may improve fiscal revenues’ predictability.
• Repairing corporate balance sheets in the construction sector to increase housing supply.

Accelerated delivery of social housing would mitigate the impact of rising housing prices on the poor. The government has taken measures to increase the availability of social housing units to low-income groups, including by incentivizing private investment through tax exemptions, and provision of financial incentives for the restoration of old properties to be loaned for social housing. Ensuring that eligibility criteria for rent subsidies and social home loans are prudently assessed and means-tested is important.

The authorities regarded property prices as broadly in line with fundamentals, but acknowledged strong demand pressures. They indicated that inflows of foreign workers and tourists are the key demand drivers in the housing market, with acute impact on rents. The reduced tax rate on rental income and the IIP were not viewed as major demand-side factors. The authorities emphasized that risks related to bank exposure to the property market are mitigated by the small fraction of buy-to-rent loans, the diversification of credit risk among many small borrowers, and conservative lending practices, including prudent haircuts on collateral values. However, they agreed that closing further data gaps is necessary, as they are evaluating possible macroprudential policies to mitigate financial stability risks. They intend to publish a White Paper with a view to strengthen the legal framework in the rental market, including through registration of rental contracts. They highlighted that several measures in the 2018 Budget will increase the availability of social housing.”

From the IMF’s latest report on Indonesia: