The Unassuming Economist

A new IMF note on Malaysia’s housing market points out that:

• “The high growth in housing prices over the past two years cannot be easily attributed to the factors that, historically, have explained developments in house prices (…) the growth rate in house prices displays a structural break in 2010.”

• “In particular, the behavior of residential loans does not seem to contribute to the recent dynamics of house prices.”

“House prices have increased rapidly, outpacing income and rental growth, along with strong demand for residential property loans, driven by a robust labor markets and falling lending rates. However, underwriting standards do not appear to have deteriorated, as evidenced by lower default rates by month on book for more recent vintages,” says the annual IMF economic report on Malaysia.

House prices are overvalued by “5–15 percent” according to a new IMF report on the Belgium economy. The report says that  “Risks of a sharp correction of real estate prices appear contained. Property prices have risen by 110 percent in real terms since 2000, and, unlike in other EU countries, continued to increase through the financial crisis. Overvaluation estimates range from 10–60 percent, but valuation estimates based on price-to-income and price-to-rent ratios often miss catch-up effects. A finer assessment (interest-adjusted affordability regression analysis) suggests overvaluation of 5–15 percent. In fact, absolute prices remain moderate by European comparison. High ownership rates (around 70 percent), coupled with persistent housing shortages, are likely to prevent a rapid price decline. Robust household balance sheets, the prevalence of fixed interest rate mortgages, and the recent tightening of capital requirements on mortgage lending should limit the impact of an interest rate and/or unemployment shocks on the quality of the mortgage portfolio. However, the prevalence of fixed-rate mortgages shifts the interest rate risk to banks.”

“Reflecting structural factors both shared with many other countries and unique to Australia, real house prices have roughly doubled since 1990 (Figure 1). After growing broadly in line with real GDP per capita from 1960-90, real house price inflation picked up in the 2000s and exceeded income growth for much of the period up to the global financial crisis (Figure 2). As a result, the median house price to income ratio rose sharply from around 3 at the beginning of the 2000s (when based on the authorities’ preferred measure for all dwellings) peaking at just over 4 in 2009 (Figure 3). Since then the price/income ratio has eased back and international comparisons suggest that while Australia’s is on the high side it is not out of line with peers (Figure 4). Rising house prices were also accompanied by increased household borrowing with the debt to income ratio rising from among the lowest at 46 percent in 1990 to around 150 per cent in 2013,” according to the latest IMF’s annual report on Australia.