The Unassuming Economist

Who is buying in the city of Vancouver? And how? New research by Andy Yan (Bing Thom Architects) looks at all the sales to occur within three west side neighborhoods in the City of Vancouver over a 6 month period and the ownership and mortgage patterns within these titles. There were a total of 172 transactions, with a total dwelling value of $525 million and with a starting price of $1.25 million and above. Here are some of the interesting findings: in terms of cash vs. mortgage, the study finds that 82 percent of the properties held a mortgage. In terms of ownership, 109 properties were listed with a single name and only 8 listed as corporation. In terms of occupations, 52 were listed as homemaker/housewife. And 66 percent of the 172 buyers had non-anglicized Chinese name. On a separate note, Tony Roy (BC Non-Profit Housing Association) says that nearly half of all renters are pouring more than 30 percent of their income into rent, while 24 percent in Metro Vancouver are spending more than half of their income on rent.

Macroprudential Policies: Are they working? More needed? According to the Central Bank of Canada, there have been four successive rounds of macroprudential tightening. The main target has been the rules for insured mortgages. For example, the maximum amortization period for insured loans has been shortened from 40 years to 25. Loan-to-value ratios have been lowered to 95 percent for new mortgages, and 80 percent for refinancing and investor properties. Qualification criteria such as limits on the total debt-service ratio and the gross debt-service ratio, as well as requirements for qualifying interest rates, have also been tightened.

The measures taken have resulted in higher average credit scores, which have improved the quality of mortgage borrowing. With respect to household credit growth, the trend growth of mortgage credit declined from 14 percent in 2007–08 to around 5 percent in 2013–15. However, David Watt at HSBC Bank Canada says that there is a strong case for further macroprudential measures. He points out the trend in residential investment (see figure below on the left) and says that “the rise in residential investment as a percentage of GDP between 2002 and 2008 was in the backdrop of a generally rising terms of trade … With the terms of trade now worsening, it suggest that these trends should cool off, not accelerate.” Moreover, the OECD says that “(…) high household debt and strong price increases in some markets (single dwellings in Toronto and Vancouver) that are already expensive relative to fundamentals, further macro-prudential tightening on mortgage lending in these markets, such as maximum loan-to-value or debt-servicing ratios, should be implemented to ensure financial stability.”

Impact of low oil prices on house prices: On the impact of the ongoing oil price slump, FannieMae makes a very interesting comparison of current house price risks in oil-producing states in the U.S. to those in the 1980s oil bust. It says: “Real oil prices peaked in 1980, followed by a near-decade-long decline. This included a crash in late 1985. A clear pattern exists. Real oil prices first fell, then with a time lag, oil industry employment declined (along with royalties and state and local tax receipts). This in turn weakened the broader labor market and eventually drove house prices downward as demand fell (…) [The FannieMae study finds that] home price weakness will not be as severe in most oil patch areas as it was in the 1980s. Still, the three states with most risk of a decline are WY, ND, and AK. (…) The resilience of shale oil production will be key. Thus far, in the short run, it has remained relatively viable, and while industry employment has been declining, losses are still modest relative to the 1980s. States with higher oil industry concentrations are showing comparatively weaker general labor markets. Although there is no evidence yet of negative house price effects, given the historical time lags (…),” these developments will need to be followed very closely. In Australia, homes in some mining “towns have lost almost three quarters of their value after the country’s resource boom peaked and commodity prices plunged,” according to CBRE Group Inc.

Impact of interest rates on house prices: On the impact of an increase in monetary policy on house prices, John Williams (Federal Reserve Bank of San Francisco) reaches two conclusions: “First, monetary policy actions have sizable and significant effects on house prices in advanced economies. That is, an increase in interest rates tends to lower real (inflation-adjusted) house prices. Second, this reduction in house prices comes at significant costs in terms of reductions in real gross domestic product and inflation. A typical estimate is that a 1% loss in GDP is associated with a 4% reduction in house prices. This implies a very costly tradeoff of using monetary policy to affect house prices when macroeconomic and financial stability goals are in conflict.” Moreover, “An important channel for monetary policy transmission is through mortgage markets. (…) the effects of an interest rate lift-off, from the zero lower bound, on homeowners depend on three factors: the prevalent mortgage type in the economy (fixed or adjustable rate), the speed of the lift-off, and the inflation rate during the lift-off. This channel of transmission suggests that if the purpose of the lift-off is to normalise nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincing signs of inflation taking off. Furthermore, the lift-off should be gradual and in line with inflation”, according to a VoxEU column by Carlos Garriga, Finn Kydland, and Roman Šustek.

Macroprudential and Monetary Policies: In October, the Federal Reserve Bank of Boston and the Bank of Finland held separate conferences on this topic. Also, in a speech on Evaluation and macroprudential policy, Claudia Buch, Deputy President of the Deutsche Bundesbank said that “The available evidence [on macroprudential policy] is very sparse; it is often no more than cross-sectional analyses across different countries derived from short time series.” In another speech by Stefan Gerlach—Deputy Governor at the Central Bank of Ireland—said that “Earlier this year, the Central Bank of Ireland brought in macro prudential measures for residential mortgage lending. The motivation for doing so was to limit lending of the type that was shown to be particularly risky in the financial crisis, and thereby enhance the resilience of both households and banks. (…) It is too soon to assess what the impact of these measures on the economy has been, as only a small number of loans drawn down have been subject to these rules and as banks may have had some initial difficulties implementing the rules. In fact, the banks have not yet been required to report their compliance with the rules. However, we have seen some evidence that house price expectations have declined, suggesting that the speculative element of the property market has become less important, as buyers recognise that risky mortgage lending will not be allowed to fuel another devastating housing bubble.”