The Unassuming Economist

A new IMF paper “analyzes the conflict between the objective of increasing access to housing finance and the dangers associated with fast-growing housing credit. [The paper finds the following:] First, housing finance characteristics vary widely across countries, and several characteristics are correlated with the relative depth of mortgage markets. (…) Second, some of the housing finance characteristics associated with deeper mortgage markets are also associated with increased risks of crisis. (…) Third, in this context, both advanced and emerging markets should avoid relaxing house financing standards in order to achieve deeper mortgage markets, and focus first on doing so through improving institutions (for example, legal rights) and the macroeconomic environment. Fourth, macroprudential policies, and in particular housing finance regulation, should be the first line of defense for handling mortgage market booms, as their narrow focus gives them an advantage over monetary policy. However, their effectiveness beyond the short run has yet to be proven. Fifth, the role of monetary policy in addressing house-related credit booms should not always be downplayed. Despite the absence of important inflation pressures, about 60 percent of the identified past real-estate booms occurred as a result of, or at the same time as, rapid economic growth and broad high credit growth in the economy. Monetary policy would be a necessary complement of macroprudential measures in those cases. Finally, dealing effectively with real-estate booms requires a broad mix of policies. Macroprudential and monetary policies are key ingredients, but fiscal incentives and house supply considerations are structural country-specific elements that may bear heavily on the probability of booms occurring and the potential costs of a bust.”

“Housing prices have increased rapidly in recent years, raising concerns that the market may be undergoing a bubble. House prices have nearly doubled in real terms over the last decade, equally for subsidized and commercial housing, and are almost 40 percent above their peak in 1996. The price hikes have outstripped increases in construction prices and were mainly driven by a rising trend in the capital and two other large cities. However, the increase in housing prices has been less pronounced after adjusted for income levels and the quality of newly constructed housing. House price increases have also surpassed rental increases (…). However, household income has also increased strongly in the recent decade, alleviating the burden of mortgages on households and boosting demand for housing,” says the latest IMF report on Colombia.

Moreover, the report says that: “The exposure of households and the financial sector to house price developments continues to be low (…). The growth of mortgages in banks’ loan portfolios remains high, although it has slowed marginally to 17.3 percent in real terms in September 2014. Credit risks are, however, mitigated by a low overall stock of mortgages (about 10.5 percent of total loans), conservative provisioning, and lower housing finance interest rates, which are capped to the lowest rates prevailing for other type of lending. Banks have also been moving towards greater amounts of fixed rate funding for mortgages from variable rates, which should strengthen profitability in a low interest rate environment. Moreover, housing loans extended in recent years have shown less deterioration compared to those made in the past. At 17.5 percent of GDP and 28 percent of disposable income, household debt is moderate, and debt service-to-disposable income is low (9 percent). Although slightly higher than a year ago, LTVs remain low (52 percent).”

“(…) there is some risk that a protracted period of low interest rates could spawn a credit fueled housing bubble (…). Credit to households has been growing by about 7 percent y/y, yet household debt seems managable (data vary by source). If a bubble were to develop, housing prices could correct, compressing household consumption or triggering defaults and possibly disrupting credit to the economy. With rising housing prices spanning decades, reflecting population and job growth combined with zoning and other rules that constrain supply, there seems no immediate reason to expect a correction, although pockets of risk are possible,” according to the IMF’s new report on Luxembourg.

“There are no signs of asset price bubbles. (…) Housing prices continued to increase, but there is no evidence of misalignment from the trend average and the housing price-to-rent ratio was 15 percent―one of the lowest in the region,” according to IMF’s latest report on Peru.

“Though it has cooled recently, Switzerland’s house prices have had a rapid run-up over the last decade, and mortgage debt is high as percent of GDP (…). The economy could thus be vulnerable to a sharp decline in house prices, which would weaken household balance sheets and impede growth. Such a decline would also adversely affect the banking and insurance industries, with their large respective exposures to the mortgage market and real estate,” says the new IMF report on Switzerland.

On the measures taken by the Swiss authorities, the report points out that the “(…) Swiss authorities have undertaken various prudential measures over the last three years aimed at reducing housing-related risks. Swiss household debt (mainly mortgages) is high by international standards, and mortgage debt has been rising steadily since 2008, in tandem with a buoyant housing market (…). To reduce related financial stability risks, the authorities have undertaken a number of prudential measures, including strengthened bank “self-regulation” standards approved by FINMA, effective September 2014 (…). These measures appear to have had some effect, as housing and mortgage markets show some signs of cooling. The growth rate of residential real estate prices has eased both for owner-occupied apartments and single family houses, including in areas, such as Lake Geneva, that previously saw rapid house price growth (…). Mortgage growth has also decelerated, although this effect is less pronounced (…). Similarly, price-to-rent and price-to-income ratios have started to stabilize (…). The percent of new mortgages for owner-occupied real estate with loan-to-value ratios exceeding 80 percent have also been on a declining trend. As the authorities have taken a range of measures to address the risk of a build-up of imbalances in the housing and mortgage markets, it is difficult to clearly disentangle which have been the most effective. However, the consensus view among the authorities and banks was that the required down payment from the borrower’s own funds (not funded by using pension savings) has perhaps been the most important measure.”