The Unassuming Economist

“A strong housing market is becoming a potential source of risk. Mortgage rates are at historic lows and have boosted new mortgage lending to a 10-year high, thus putting upward pressure on prices. Residential housing offer prices increased by 10 percent y-o-y in 2015:Q4, despite a 16 percent increase in housing starts. A slight deterioration in the affordability-of-housing indicators has taken place recently despite strong wage growth and a continued decline in interest rates. On the other hand, the estimated average apartment price-to-annual wage ratio of 4 is still low by international standards. (…) Going forward, continued vigilance will be needed and, if current trends in the mortgages segment continue in the coming months, the macroprudential stance should be further tightened. Preference should given to targeted measures, including raising risk weights on mortgages, lowering LTV limits with possible regional differentiation, and issuing clear guidance on maximum debt-to income limits”, says IMF’s report on Czech Republic.

In a separate report, Jérôme Vandenbussche (IMF) points out that residential prices and rents have increased steeply since 2009, particularly in big cities. This is due to an unexpected surge in housing demand that is explained by stronger than expected net immigration in recent years. In 2009, net immigration was expected to rise from near zero to about 100,000 persons in 2014. However, the actual figure turned out to be 550,000. In his analysis, Vandenbussche takes a look at the housing supply response to changes in house prices and finds “(…) evidence that the supply response to changes in housing prices has declined over the past several years (…).”

In terms of policies to boost the supply response,  Vandenbussche discusses the 10-point action program to stimulate residential construction. He also says that “(…) several other factors, including stricter rent regulation and higher taxation of real estate transactions, are likely to have played a role in the recent decline of the price elasticity of residential investment [This includes] Two tightening rent control measures were taken in recent years (…) The real estate transfer tax rate has been continuously creeping up since 2006 (…) Other factors likely include inadequate staffing at planning and building authorities, and growing shortages of skilled worker in the finishing trade.”

“Rapid house price increases call for early policy action—including loosening housing supply restrictions, eliminating adverse tax incentives, and developing and timely implementing well-targeted macro prudential tools”, says IMF’s latest report on Denmark. The report points out that “Following speculative pressures on the exchange rate in early 2015, Denmark’s Nationalbank (DN) lowered its deposit policy rate—which first broke through the zero bound in 2012—deeper into negative territory (…). In the resulting environment of historically low mortgage rates, real house prices rose over 6 percent in 2015.”

In two separate reports, Giang Ho (IMF) provides a deeper analysis on house price and supply developments in Denmark.

On house prices, Ho says that price developments have been characterized by a “growing divergence” between different parts of the country. Big cities such as Copenhagen has experienced much more rapid price increases than other parts. A similar development is also seen in the market for owner-occupied flats (experincing larger price increases) compared to single-family homes. These regional house price differences are explained by a number of demand and supply factors: demographic trends, rising income and employment, favorable user cost of housing, and housing supply lagging behind demand. Ho’s analysis also points to “emerging overvaluation in Copenhagen and Frederiksberg’s housing markets—particularly in the market for owner-occupied flats.”

On housing supply, “Cities such as Copenhagen where the stock of housing is relatively inflexible and responds slowly to changes in housing demand could see higher price growth (…) the potential price impact of supply constraint can be economically significant”, says Ho. So how the supply constraints can be addressed? “While natural land constraints are difficult to overcome, distortions in the housing markets could be reduced to alleviate the supply shortage in high-stress urban areas such as Copenhagen. For example, there is scope for relaxing zoning regulations in certain areas. In addition, reducing rental controls to allow freely determined rents to apply to a larger fraction of the housing stock, and creating the incentives for municipalities and/or private developers to put land to good use would also be helpful. This is particularly relevant in the current juncture, given the low interest rate environment as well as the recent influx of asylum seekers putting additional pressure on the demand for housing”, according to Ho.

In another report on macroprudential policy, Jiaqian Chen (IMF), notes that given high household debt and other mortgage characteristics–like variable rates and interest only loans–financial stability concerns could  emerge if house price growth continues. She estimates the potential effects of tightening macro prudential policies. She finds that “First, the overall impact from macroprudential policies on the real economy appears limited, while the effect on debt levels can be significant. Second, out of the various modeled policies, amortization requirements seem to have the strongest impact on household debt, suggesting the importance of limiting the growth of deferred amortization mortgages.”