The Unassuming Economist

House price growth moderated in 2012, although with some regional variation. National house prices fell 1.2 percent over the second half of 2012, driven mainly by the sharp retrenchment in British Columbia. In turn, this was mainly the consequence of a sharp correction of prices in the Vancouver area, where condos prices were down to their 2010 levels as of December 2012. On a yearly basis, national house prices index is still up by about 3.5 percent in 2012, slightly down from the 6 percent growth in 2011, with Toronto, Calgary and in particular Regina posting the largest increases, according to a new IMF report on Canada.

Moreover, the report points out that house prices are still on the strong side. As of December 2012, at a national level house prices were still almost 30 percent above their January 2009 trough. In Q3:2012, the house price-to-rent ratio was 60 percent above its historical average in Canada, more than in any other advanced economies with the only exception of Norway and Belgium. Price-to-income ratios also look high, and at almost 40 percent above their long-term average are among the highest.

The latest IMF’s report on Denmark says that: 

The Danish housing market continued its decline through 2011 and the first half of 2012, despite a short respite in 2010. Real house prices have fallen by 26 percent since their peak in 2007Q1, after a two-year period in which prices rose by over 60 percent. Housing starts declined by 17 percent in 2011, and by 28 percent in the first half of 2012 relative to the first six months of 2011. Year-on-year prices for the residential properties fell by 5–6 percent in 2012 Q2.

Indicators of house price misalignment are mixed. The price-to-income ratio and price-to-rent ratio remain above their 1970–2010 historical averages but by less than one standard deviation (0.7 and 0.9 respectively).

The housing market remains vulnerable. Mortgage loans with variable rates and deferred amortization loans (interest-only for 10 years) account for 74 and 56 percent of the mortgages respectively. Given the high debt levels of Danish households, this creates a threat of higher delinquencies should rates rise or incomes fall.

Two different pricing models are examined, which provide some mild, but on balance inconclusive, evidence that prices are higher than suggested by current fundamentals.

Housing in Hong Kong SAR is expensive. Compared to other regions, house prices in Hong Kong SAR are less affordable as measured by the ratio of median household income to median house price. In absolute terms, U.S. dollars per square meter, prices are also relatively expensive and premium real estate prices are on par or higher than in other high-cost housing.

A regression-based approach indicates prices are about 10 percent above the level suggested by current macroeconomic fundamentals.However, the fundamentals themselves are in some sense abnormal, as loose global monetary conditions have pushed down considerably Hong Kong SAR’s real interest rate. The real interest rate, moreover, is a key driver of housing prices in the model. To illustrate the impact of the eventual normalization of global monetary conditions, the regression estimates were used to calculate the price that would prevail if the real interest rate was at its 2003–07 average, with a concomitant change to credit. This exercise suggests that housing prices are some 30 percent higher than they would be if Hong Kong SAR’s real interest rate returned to the 2003–07 average. An asset pricing model, however, finds that prices are broadly consistent with fundamentals. The model compares the market price with a benchmark based on an equilibrium relationship between prices, rents, and cost of ownership. The basis for assessing misalignment from fundamentals is that the cost of owning a house (imputed rent) should be the same as the cost of renting a similar house for the same time period. By this measure, smaller-sized flats are found to be some 7 percent above the benchmark while the luxury end of the market is found to be slightly below the corresponding benchmark.

According to a new report, “Macroeconomic risks related to a correction in real estate prices appear to be relatively contained. The increase in housing prices (over 100 percent in real terms since the mid 1990s) has been supported by stronger fundaments (higher population growth, relatively low supply of housing, and low household indebtedness) than in other countries with rising real estate prices, but also by tax incentives that have fueled demand without addressing underlying supply constraints. There is a perception of price overvaluation, especially in Paris (by 10-20 percent at end-2011 according to staff estimates). However, there is no housing glut or household debt overhang that could trigger a sudden price adjustment. Moreover, stress tests suggest that banks are well placed to absorb the impact of a possible sizable price adjustment owing to tight underwriting criteria (emphasizing sustainability of the borrower’s income, not collateral value) and the absence of nonrecourse loans. The impact of a possible price correction on private demand would also be contained reflecting weak evidence of wealth effects on consumption.”

Several countries in Central, Eastern and Southeastern Europe used a rich set of prudential instruments in response to last decade’s credit and housing boom and bust cycles. A new paper collects detailed information on these policy measures in a comprehensive database covering 16 countries at a quarterly frequency. The authors use this database to investigate whether the policy measures had an impact on housing price inflation. Their evidence suggests that some—but not all—measures did have an impact. These measures were changes in the minimum CAR and non-standard liquidity measures (marginal reserve requirements on foreign funding, marginal reserve requirements linked to credit growth).