The Unassuming Economist

Global Housing Watch Newsletter: January 2018

This post is written by Fang Yao. Fang is a Senior Analyst in the Economics Department of the Reserve Bank of New Zealand.

The housing market played a prominent role in the 2007-2009 ‘great recession’ in the United States, and housing markets in other jurisdictions have also been worryingly volatile since the turn of the century. Elevated household debt and high house prices, combined with subdued inflation outcomes, pose a challenge for both monetary and macro-prudential policy. A recent conference aimed to enhance understanding of the linkages between housing, household spending and savings (borrowing) and explore policy responses.

The conference on Housing, Household Debt and Policy took place in Wellington, and it was organized by the Reserve Bank of New Zealand on December 11-12, 2017. The organizing committee was composed by Christie Smith (Reserve Bank of New Zealand), Fang Yao (Reserve Bank of New Zealand), Robert Kirkby (Victoria University of Wellington), and Jonathan Chiu (Victoria University of Wellington and the Bank of Canada).

First day

Grant Spencer, Acting Governor of the Reserve Bank of New Zealand, provided opening remarks. His speech stressed the importance of better understanding housing and household behaviours, and in particular, using micro data analysis to inform policy decisions.

Christopher Carroll (Johns Hopkins University) then gave a keynote address on “The normal science of heterogeneous-agents macroeconomics”. Carroll questions the micro foundations of representative agent models, likening them to Ptolemaic astronomy, in which geocentric planetary motion is predicted using increasingly ad hoc geometric epicycles rather than underlying laws of motion. He encourages the integration of heterogeneous micro behavior into macro models, taking aggregation seriously, and proposes the use of micro data to test competing hypotheses about consumer behavior.

Carlos Garriga (Federal Reserve Bank of St. Louis) then presented his joint work with Aaron Hedlund (University of Missouri). Their paper analyses how arrangements in the mortgage market impact the dynamics of housing (boom-bust episodes) and the economy using a structural equilibrium model with incomplete markets and endogenous adjustment costs. In response to mortgage rates and credit conditions, the model can generate movement in house prices, residential investment, and homeownership consistent with the U.S. housing boom-bust cycle. The propagation of shocks to the macro economy is asymmetric with much higher consumption sensitivity during the bust than the boom, due to the endogenous fragility caused by mortgage debt.

Following Garriga, James Graham (New York University) discussed how household’s consumption spending responds to aggregate, regional, local and neighborhood house price shocks. Using a large panel of consumers over the period of 2004-2015, he finds that aggregate price movements are associated with the largest consumption movements, but that neighborhood-level price movements have a stronger effect than city-level price movements. He explains this empirical finding by noting that households are more likely to move across counties or neighborhoods than they are to move between cities, states, or regions. Thus, a house price increase in a particular neighborhood generates a wealth effect for households likely to move to other neighborhoods.

In the following session, Fang Yao (Reserve Bank of New Zealand) presented joint work with Jonathan Chiu (Victoria University of Wellington and the Bank of Canada), Robert Kirkby (Victoria University of Wellington), and Karam Shaar (Victoria University of Wellington). Their paper that identifies the marginal propensity to consume (MPC) out of housing wealth, using New Zealand micro data. The authors find an asymmetric interaction between the housing wealth effect and household leverage. In particular, when house prices are growing, household leverage weakens the MPC out of housing wealth. This result – that leverage weakens the marginal propensity to consume – stands in sharp contrast to Mian and Sufi (2013), who find that US consumers’ MPCs are larger when leverage is high, though in their data house prices are falling.

Fiona Price (Reserve Bank of Australia), with co-author Giancarlo La Cava (Reserve Bank of Australia), studies a related topic using Australian household micro data. Their results suggest that a ‘debt overhang channel’ may exist in Australia: higher levels of housing debt (relative to income and assets) and lower debt-servicing capacity are found to reduce growth in spending.

Dirk Krueger (University of Pennsylvania) concluded the first day with the second keynote address, titled “intergenerational redistribution in the great recession”, which presented joint work with Andrew Glover (University of Texas, Austin), Jonathan Heathcote (Federal Reserve Bank of Minneapolis), and José-Víctor Ríos-Rull (University of Pennsylvania). The Great Recession saw sharp drops in labour earnings and in asset prices. The authors construct a stochastic overlapping-generations general equilibrium model to study the welfare losses from these declines distributed across different age groups. The model predicts that the Great Recession implied modest average welfare losses for households in the 20-29 age group, stemming from poor labour market outcomes, but very large welfare losses of around 10% of lifetime consumption for households aged 60 and older, resulting from declines in asset prices.

Second day

Greg Kaplan (University of Chicago) gave the third and final keynote presentation.  His work, joint with Andreas Fuster and Basit Zafar (both Federal Reserve Bank of New York), collects and interprets new survey evidence, on households’ consumption response to hypothetical income gains. By surveying consumers about hypothetical consumption behaviour, Kaplan and co-authors can directly address a wide range of questions about the effects of changes in wealth. They find a range of interesting results, including size and sign asymmetries, little responses to news, and important liquidity effects. They further contrast these findings with theoretical models and find that the two-asset incomplete markets model of Kaplan and Violante best matches the empirical findings.

In the following session, Aaron Hedlund (University of Missouri) presented “Monetary policy, heterogeneity, and the housing channel”, in which he and co-authors Fatih Karahan (Federal Reserve Bank of New York), Kurt Mitman (Stockholm University and CEPR), and Serdar Ozkan (University of Toronto) investigate the role of housing and mortgage debt in the transmission and effectiveness of monetary policy.  They build a heterogeneous agent New Keynesian model with a frictional housing market to quantify the various mechanisms. The quantitative findings are as follows: 1) About 20% of the drop in aggregate consumption from a contractionary monetary shock is due to declining house prices; 2) Responses are asymmetric, with contractionary shocks yielding a larger response of all variables; and 3) Monetary policy is more effective in a high loan-to-value (LTV) environment.

Andrew Coleman (University of Otago) next presented work which develops a heterogeneous agent overlapping generations model that examines how the neutrality of the tax system with respect to inflation depends on the price elasticity of the housing supply. Coleman’s model, which endogenizes house prices and rents and incorporates detailed tax regulations and bank-imposed credit constraints, shows 1) Inflation has large effects on the tenure arrangements of young households irrespective of the housing supply elasticity; and 2) Inflation can improve the welfare of some low income young households if the supply is sufficiently elastic. The welfare costs of inflation are reduced by taxing real rather than nominal rates of interest.

In the first afternoon session, Patrick Moran (University of Oxford) presented “Temptation, commitment, and hand-to-mouth consumers”, joint with Agnes Kovacs (University of Oxford). This paper rationalises the existence of “wealthy hand-to-mouth” households by arguing that households are tempted to consume their liquid assets, and therefore purchase housing as a savings commitment device. A life-cycle model with non-standard preferences is able to match the empirical fraction of hand-to-mouth households and rationalises heterogeneity in the marginal propensity to consume.

Yunho Cho (University of Melbourne) and coauthors Shuyun May Li and Lawrence Uren (both at the University of Melbourne as well) explore the implications of negative gearing tax associated with housing investment by conducting a quantitative study of the Australian housing market. They find that removing the tax advantage that prompt negative gearing would result in lower house prices, as well as higher rents and homeownership rates. Their welfare analysis suggests that eliminating negative gearing would lead to an overall welfare gain of 1.5 percent for the Australian economy, with 76 percent of households becoming better off. However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young with high earnings, lose.

In the last session, Lasse Bork (Aalborg University) presented work with Stig Vinther Møller (Aarhus University) decomposing the metro-level house price variation into aggregate structural shocks and regional structural shocks. They find that regional shocks have a significant positive effects on the house prices in the metropolitan areas of California, while the aggregate counterparts were often small but nevertheless non-negligible, as seen in the historical structural decomposition of the house prices series.

Selva Baziki (Central Bank of the Republic of Turkey) presented the last paper of the conference. Her paper, co-authored with Tanju Çapacıoğlu (Central Bank of the Republic of Turkey), studies how two policy shocks to LTV ratios affected bank lending and unsecured borrowing by households, using a unique and comprehensive bank-linked individual credit data set from Turkey. They show that following the introduction of an LTV cap, banks that were previously above the limit reduced residential lending in favour of unsecured general-purpose loans to new residential borrowers and riskier commercial loans.

To sum up

The conference brought together researchers from academia and central banks, and demonstrated that there is rich and vibrant research investigating households, housing, and household indebtedness. Researchers are using sophisticated quantitative and theoretical models, and are expanding research horizons by using excellent micro data. We have learned a great deal about the drivers of housing cycles, their consequences for the real economy (in particular household spending and savings), and their implications for tax, monetary and macro-prudential policy.  The papers in this conference offer new data, new analysis, and new insights, and we hope they will inspire future research.

On cross-country:

• Comparative Analysis of Newly-Built Housing Quality in Poland and Lithuania – De Gruyter

On the US:

• The Hazards of Concentrating Wealth in Homeownership – Federal Reserve Bank of St. Louis
• A Bad Start on Reforming Fannie and Freddie – Bloomberg
• The Corrupt Politics of Low-Income Housing – Reason
• Fannie Mae will ease financial standards for mortgage applicants next month – Washington Post
• How the latest affordable housing policy benefits homeowners and realtors, not first-time buyers – American Enterprise Institute
• The Great Urban Housing Solution That Has No Good Name – The Atlantic
• Remodeling Market to March Higher in 2018 – Harvard Joint Center for Housing Studies

On other countries:

• [China] Housing market sentiment and intervention effectiveness: Evidence from China – Emerging Markets Review
• [China] Is there a housing bubble in China? – Sun Yat-sen University, Guangzhou
• [China] China’s Hot Housing Market Begins to Cool – Wall Street Journal
• [Czech Republic] Who actually decides? Parental influence on the housing tenure choice of their children – The Czech Academy of Sciences
• [Iceland] Discrimination in the Housing Market as an Impediment to European Labour Force Integration: The Case of Iceland – Lund University
• [India] India’s property slowdown puts developers in crosshairs – Financial Times
• [Italy] Matching and Credit Conditions: Evidence from the Italian Housing Market Survey – Luiss Lab of European Economics
• [Singapore] Curb Your Enthusiasm for Singapore Property – Bloomberg
• [United Kingdom] Why Britain’s buy-to-let boom is over – Economist
• [United Kingdom] Housing in London: Addressing the Supply Crisis – London School of Economics
• [United Kingdom] What will happen to house prices in 2018? – Financial Times
• [United Kingdom] Divorce, Separation, and Housing Changes: A Multiprocess Analysis of Longitudinal Data from England and Wales – Demography

Photo by Aliis Sinisalu

From the IMF’s latest report on Tonga:

“Housing credit continues to rise supported by lower interest rates and economic growth. A housing bubble is unlikely to develop. Tonga has a rigid land tenure system with lengthy land registration. The secondary market for housing is very small and slow, with approximately 10 house sale transactions per each year. Most bank credit finances construction of owner-occupied dwellings and housing for personal use rather than for investment. The lending to households is collateralized, where land is the only asset that is qualified as collateral by banks. The limited time of land use depreciates its value as collateral over time.

Housing credit continues to rise supported by (i) low lending rates for housing loans; (ii) revision of the Land Act; and (iii) other initiatives. Higher payments for import of construction materials driven partially by removal of custom duty on construction materials also contributed to the increase of housing credit.

The household credit quality is not a clear concern. Although housing credit is growing rapidly, there are no signs of weakening ability of households to service the debt. All loans are salary-based, where loan payments are deducted directly from the salaries. The remittances continue to increase, and consumer confidence and demand are also on the rise. On the supply side, the ratio NPLs continue to decline. In FY2017, the value of collateral held against the delinquent loans reported by banks was at T$40.5 million compared to total NPLs of T$16.9 million, which indicates that banks hold sufficient collateral to cover any shortfall in loan-loss provisions.”

On cross-country:

• Q3 2017: Continued strong house price rises in Europe, Canada and parts of Asia, but globally housing markets are slowing sharply – Global Property Guide
• High house prices pose persistent risks in countries with housing markets slow to react to homeownership costs – Moody’s
• Real and financial cycles in EU countries: Stylised facts and modelling implications – European Central Bank
• Housing finance – International Growth Centre
• What if Real Estate Investors Are Looking at the Housing Market All Wrong? – Bloomberg

On the US:

• Pent-Up Demand and Continuing Price Increases: The Outlook for Housing in 2018 – Federal Reserve Bank of Kansas
• The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco – NBER
• The Housing Market Crash and Wealth Inequality in the U.S. – NBER
• Are Lemons Sold First? Dynamic Signaling in the Mortgage Market – NBER
• Portfolio Choice with House Value Misperception – Federal Reserve Bank of Boston
• The Impact of Interest Rates on House Prices and Housing Demand: Evidence from a Quasi-Experiment – American Enterprise Institute
• Housing Voucher Policy Designed to Expand Opportunity Targets Areas That Need It – Center on Budget and Policy Priorities
• Rent Control: Econ 101 Applies – Cato Institute

On other countries:

• [Brazil] No more roller coaster ride for Brazilian housing market? – Global Property Guide
• [Cambodia] Cambodia Finds New Target for Real Estate: Chinese Investors – New York Times
• [China] A Reexamination of Housing Price and Household Consumption in China: The Dual Role of Housing Consumption and Housing Investment – The Journal of Real Estate Finance and Economics
• [Germany] German house prices are accelerating! – Global Property Guide
• [Hungary] Property boom in Hungary continues in 2017 – Global Property Guide
• [India] Mumbai Home Prices Post First Drop in Decade Amid Modi Crackdown – Bloomberg
• [Ireland] Irish house prices will outpace all Europe over next 2 years – Global Property Guide
• [Italy] Italy an outlier as property prices continue to fall, data show – Financial Times
• [Montenegro] Montenegro’s housing market recovering, amidst booming tourism – Global Property Guide
• [Peru] House prices in Lima plunged in Q1 2017 – Global Property Guide
• [Thailand] Thailand’s housing market losing steam – Global Property Guide
• [Uruguay] House prices rising in Montevideo – Global Property Guide

Photo by Aliis Sinisalu

On international house pricing:

• Measuring House Prices in the Long Run: Insights from Dublin, 1900-2015 – AEA
• A Tale of Two Countries: Comparing Booms, Busts and Bubbles in the United States and Chinese Housing Markets – Paper
• Analyzing the Changes in the Distribution of House Prices in Beijing – AEA
• Locally Weighted Quantile House Price Indices and Distribution in Japanese Cities, 1986 – AEA
• Do Airbnb Properties Affect House Prices? – Paper
• The Sharing Economy and Housing Affordability: Evidence from Airbnb – Paper
• Think Globally, Aggregate Locally: Index Consistency in the Presence Asymmetric Appreciation – Paper
• S. Metropolitan House Price Dynamics – Paper
• Did Investors Price Regional Housing Bubbles? A Tale of Two Markets – Paper
• Monetary Policy and the Housing Market – Paper
• Teardowns, Popups and Bump-outs: What Do Building Permits Say About Housing Supply? – Paper
• House Price Beliefs and Leverage Choice – Paper
• Do Gasoline Prices Affect Residential Property Values? – Paper
• Bank Risk-taking and the Real Economy: Evidence From the Housing Boom and its Aftermath – AEA
• Do Financial Constraints Cool a Housing Boom? Theory and Evidence From a Macroprudential Policy on Million Dollar Homes – Paper
• Housing Appreciation and Marginal Land Supply in Monocentric Cities with Topography – Paper
• Prospect Theory, Reverse Disposition Effect and the Housing Market – Paper
• How Do Households Discount Over Centuries? Evidence From Singapore’s Private Housing Market – Paper
• Property Right Restriction and House Prices – Paper and Presentation
• Cyclical Housing Prices in Flatland – Paper and Presentation
• House Prices, Mortgage Debt and Labor Mobility – AEA
• Model-Free Estimation of the Hedonic Price for Housing Space – Paper

On household finance:

• Household Finance and Consumer Behavior – Paper
• The Housing Crisis and the Rise in Student Loans – Paper
• Home Equity and the Timing of Claiming Social Security Retirement Income – AEA
• The Effect of Debt on Default and Consumption: Evidence From Housing Policy in the Great Recession – Paper
• Housing Wealth Effects: The Long View – Paper

On mortgages:

• Time to Homeownership and Mortgage Design: Income Sharing and Saving Incentive – Paper
• The Effect of Changing Mortgage Payments on Default and Prepayment: Evidence From HAMP Resets – Paper and Presentation
• The Effect of Interest Rates on Home Buying: Evidence From a Discontinuity in Mortgage Insurance Premiums – Paper and Presentation
• Liquidity Provision, Credit Risk and the Bond Spread: New Evidence From the Subprime Mortgage Market – Paper
• Collateral Damage: The Impact of Shale Gas on Mortgage Lending – Paper
• Are Mortgage Regulations Affecting Entrepreneurship? – Paper
• Eyes Wide Shut? Mortgage Insurance During the Housing Boom – AEA
• Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection – AEA
• The Macroeconomic Effect of Government Asset Purchases: Evidence From Post-war United States Housing Credit Policy – Paper and Presentation
• How Much Are Car Purchases Driven by Home Equity Withdrawal? – Paper
• How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households – AEA
• An Empirical Study of Termination Behavior of Reverse Mortgages – Paper
• Mortgage Default with Positive Equity – Paper
• Lending Competition and Non-Traditional Mortgages – Paper

On behavioral real estate:

• How Do the CEO Political Leanings Affect REIT Business Decisions? – Paper
• Outshine to Outbid: Weather-induced Sentiments on Housing Market – Paper and Presentation
• Contact High: The External Effects of Retail Marijuana Establishments on House Prices – AEA
• Relational Contracts, Reputational Concerns, and Appraiser Behavior: Evidence from the Housing Market – Paper

On affordable housing:

• Neighbors and Networks: The Role of Social Interactions on the Residential Choices of Housing Choice Voucher Holders – Paper
• Neighborhood Choices, Neighborhood Effects and Housing Vouchers – AEA
• Waiting for Affordable Housing – Paper
• Long-Run Outcomes of HOPE VI Public Housing Demolitions for Children – AEA
• The Effects of Residential Evictions on Low-Income Adults – Paper

On property taxes:

• Greener on the Other Side? Spatial Discontinuities in Property Tax Rates and their Effects on Tax Morale – AEA
• The Hated Property Tax: Salience, Tax Rates, and Tax Revolts – AEA
• Measuring Both Direct and Spillover Effects of Taxation: Evidence From a Property Tax Break for First-Time Buyers – Paper
• Impact of Housing Tax Preferences on Home Values and Neighborhood Sorting – AEA
• Do Local Governments Tax Homeowner Communities Differently? – Paper

On agency and bargaining:

• Why Disclose Less Information? Toward Resolving a Disclosure Puzzle in the Housing Market – Paper
• Examining Both Sides of the Transaction: Bargaining in the Housing Market – Paper
• Investor Bargaining Power, Rental Externalities and Housing Prices – Paper
• When are Real Estate Flippers Smarter Than the Crowd? – Paper

On homeownership:

• African-American Mayors, Home Ownership and Mortgage Lending in US Cities – Paper
• Do Homeowners Save More Than Renters? Evidence From the Panel on Household Finances – Paper and Presentation
• Home Sweet Home: (Mis-)Beliefs About the Extent to Which Home Ownership Makes People Happy – Paper
• Job Separation Risk and Home Ownership: Evidence From Assistant Professors – AEA
• Identifying the Benefits from Home Ownership: A Swedish Experiment – Paper
• Owned Now Rented Later? Housing Stock Transitions and Market Dynamics – Paper
• Diverted Homeowners and Rental Affordability – AEA
• School Quality, Latent Demand, and Bidding Wars for Houses – AEA
• Wage Trickle Down vs. Rent Trickle Down: How Does Increase in College Graduates Affect Wages and Rents? – AEA

Photo by Aliis Sinisalu