The Unassuming Economist

The IMF’s report on Ireland says that:

“Property market conditions tightened further, mainly due to a limited supply response. Current conditions have supported robust demand recovery, but housing completions have picked up only moderately, continuing to fall well short of the underlying requirement in the economy. With the stock of properties listed for sale at a nine-year low, house price increases accelerated to 7.1 percent y/y in October 2016. The value of mortgage approvals surged by 43 percent as of November compared to a year earlier, albeit from a relatively low base and in the context of a continued contraction in the stock of outstanding mortgages. Tight housing market conditions have also led to a sharp rise in residential rents, which have now exceeded their pre-crisis peak. In response, the government introduced rental growth caps of 4 percent in Rent Pressure Zones (RPZ) starting in 2017. To ease supply constraints, the government introduced a multipronged Housing Action Plan in July to be implemented over 2017-21 (Annex II). Pressures in the commercial real estate (CRE) market remained strong, and prices increased further, particularly in the office segment. As demand is mostly funded by foreign investors and domestic equity, the exposure of the domestic banking system to the CRE market continued to decline. Despite these pressures, analysis at the time of the 2016 Article IV discussion suggested that current prices are broadly in line with fundamentals in both residential and commercial segments (…).”

 

On mitigating housing market imbalances, the report says that:

“Efforts to expand and expedite the delivery of housing and rental properties under the Housing Action Plan—a central focus of the current budget—are welcome, particularly those measures directed at mitigating supply constraints. On the contrary, the “Help-to-Buy” (HTB) scheme, set to run through 2019, raises some concerns. While temporary and relatively limited, the program provides only indirect support for supply and carries a relatively high threshold for mortgage value, suggesting scope for better targeting. At the same time, it risks exacerbating demand and pricing pressures. Plans for a phased increase in interest relief for buy-to-let landlords from the current 75 percent to 100 percent by 2021 raise similar concerns. An early review of these fiscal incentives would be warranted to ensure they are well-targeted to assist those most in need and to reduce risks of fueling demand and price pressures. To help address supply bottlenecks, consideration should be given to fasttracking the implementation of a locally levied vacant lot tax, currently expected in 2018, which aims to create incentives to increase land utilization. Administrative measures on rents, however, could dissuade construction and may prove ineffective as landlords could pass on additional costs to tenants through other fees.”

Below is an extract from the IMF’s latest report on Turkey:

“Turkish house prices have been markedly increasing for several years. The prices for homes rose cumulatively by 110 percent in nominal and 35 percent in real terms between end-2010 and July 2016. Valuation appears stretched by a number of metrics, such as price-to-income and price-to-rent ratios. The burden of household debt has also increased.

Demographic and socio-economic factors underpin the strong demand for housing. A young and rapidly growing population combined with a high and rising rate of urbanization drive demand for residential housing. In addition, the number of households has increased with a decline in average household size. Household preferences have also shifted toward newer and larger houses, with stronger construction codes.

Special sales campaigns and government stimulus have buoyed house sales since July 2016. The government launched a campaign for subsidized sales of 60,000 houses with mortgages offered at below-market lending rates and higher LTV ratios than the regulatory ceiling, in addition to applying moral suasion on banks to lower mortgage rates. Following the adoption of these measures, total house sales rose by 2 percent year-on-year in August. Since then, the LTV ceiling was raised from 75 to 80 percent.”

 

 

Also see a separate IMF report on Understanding Turkish Residential Real Estate Dynamics.

 

The IMF’s latest economic report on Austria points out that:

“House price growth has been strong in recent years by international comparisons. The cumulative increase in the house price index over 2007–2015 was nearly 40 percent. To a large extent, this increase was driven by price dynamics in Vienna. The OeNB residential price index indicator, which assesses whether prices move in line with fundamental factors, points to an overvaluation of property prices of about 22 percent for Vienna, while prices in the rest of the country appear broadly in line with fundamentals. Price increases in Vienna have moderated lately, while picking up in the rest of the country (…). Low interest rates over recent years have loosened credit constraints and increased households’ borrowing capacity, putting upward pressure on housing demand. That said, prices have been kept high by supply side constraints and other idiosyncratic factors, especially in Vienna. Reviewing and relaxing local planning systems and regulations to facilitate the supply response to price movement can help contain the price rises close to the long run trend. Are the rising prices a problem? Financial stability risks seem contained. (…) Nonetheless, the authorities need to have the legal authority to expand the macroprudential toolkit with real estate-specific instruments when needed, to limit any potential risks to banks’ portfolios if real estate price bubbles were to emerge.”

“(…)  the housing market just started to recover”, notes the IMF’s latest report on Spain.

From Global Housing Watch Newsletter: January 2017

This post is written by Niall O’Hanlon. Mr. O’Hanlon joined the IMF in 2015 as a senior economist in the Real Sector Division of the IMF’s Statistics Department. Prior to joining the IMF, Mr. O’Hanlon was Head of Prices Division at the Central Statistics Office Ireland (CSO). During his 14-year career at the CSO he introduced a number of new statistical products including the Residential Property Price Index (RPPI) and the Services Producer Price Index (SPPI).

More countries are now compiling house price indexes

Since the global financial crisis there has been significant progress internationally on the measurement of house prices. When the BIS first published its database of residential property price indexes in 2010, 37 countries were included. Today it covers 57 countries, including 18 of the G-20 countries and all of the EU member states.

A 2009 Report to the G-20 Finance Ministers on the Financial Crisis and Information Gaps identified data on the stock of dwellings, the associated price levels and their changes over time as critical ingredients for financial stability policy analysis. In 2013 the Handbook on Residential Property Price Indices (RPPIs) was published by Eurostat to provide guidance and identify best practices so as to help improve availability and cross-country comparability of house price indexes. These have been important milestones in the progress of house price measurement globally. The Global Housing Watch is also an important initiative in that it provides a platform for analysis of housing market developments worldwide.

Greater availability of indexes has helped policy makers monitor excessive house price growth and take a mix of monetary policy, micro prudential and macro prudential measures. Housing markets are receiving increasing attention and there are renewed concerns that rising prices may pose risks to some economies. For example, in November 2016, the European Systemic Risk Board issued warnings to eight EU countries on real estate vulnerabilities which pose significant systemic risks.

The map below shows that official indexes are available for 62 countries. The combined GDP of these countries accounts for around 90 percent of global GDP, making the coverage useful for multilateral surveillance. However, indexes are available for only about 30 percent of countries in the world (see map). So much more progress is needed to support policy needs in many countries. The IMF Statistics Department held its first seminar on house price index compilation in 2015. Since then, compilers from national statistical offices and central banks of 50 countries have participated. The seminars provide an overview of data sources and methods for compiling RPPIs, highlight the trade-offs involved in selecting a data source and address strategies for the longer-run development of data sources (see chart).

Data are key

The standard approach to compiling the consumer price index—comparing the prices of exactly the same products—cannot be employed since no two properties are exactly the same and we can only observe the price of property when it is transacted. Therefore, compilers must remove the impact of the changes in mix of properties sold (referred to as mix-adjustment) leaving a measure of “pure price change.” There are several techniques for mix-adjustment, varying in terms of sophistication and effectiveness. The more effective techniques require detailed information on the physical and locational characteristics of property (for example the property type and size, or characteristics of the neighborhood) as well as the transaction details (price and date).

Securing access to data is often the biggest challenge—particularly in low income countries with less developed administrative systems. The comprehensive data on property characteristics and locational attributes necessary for adequate mix-adjustment might be unavailable. Data limitations can also mean that indexes do not have full coverage of the market. For example, using only bank data will mean that compilers miss cash based transactions.

In response, compilers are looking beyond single administrative data sources towards combining different data sets to facilitate sophisticated mix-adjustment techniques. For example, the Central Statistics Office of Ireland recently switched from using mortgage data to a combination of taxation (transaction), building energy rating (physical characteristics) and census of population small area data (relative affluence or disadvantage of a neighborhood) to give a more complete and accurate picture of house price change. Compilers also are using big data sources, such as real estate web portals, for more timely and comprehensive data. Ultimately, the choice of source data will require trade-offs, in respect of comprehensiveness, coverage and timeliness.

House prices are key indicators of household wealth

House prices matter for macro prudential purposes, as well as for socio-demographics. Buying a house will be the biggest single spending decision many households make and that decision should be guided by good information on the rate of price change and how current prices compare to longer term trends. Progress also has been made in respect of other housing related social indicators that are emerging. For example, the OECD produces price-to-income and price-to-rent measures for selected countries. These indicators of long run over or undervaluation relative to long term averages help to provide a more complete picture of the developments in the housing market.

Housing market research, much of it by private sector index compilers, is increasingly concerned with measures of inequality and exclusion. For example, Zillow recently published a study on the widening gap between the bottom and top of the US housing market. More broadly there is interest in how house prices impact household balance sheets and, in turn, on consumption by households. Ownership by gender, age, cultural background or income also may add important policy dimensions.

For many countries the new challenge is to move beyond just compiling house price indexes and to address the need for a more complete picture of the housing market and its impact on society.