The Unassuming Economist

From the IMF’s latest report on Slovak Republic:

“House price growth has continued to accelerate amid rapid mortgage credit growth, driven by record low borrowing costs and looser credit standards. House price growth increased throughout 2021, reaching 22 percent y/y in 2022:Q1, with a wide gap between actual and model-predicted house prices. While housing affordability (as captured by the share of disposable income taken up by mortgage payments) remained quite high until mid-2021 given low interest rates and robust wage growth, and housing cost overburden for lower-income households is moderate from an international perspective, tightening financial conditions and higher inflation could quickly change this.

Macrofinancial vulnerabilities related to the housing market warrant close monitoring. Household debt relative to GDP has risen faster and is higher than in peer countries, due to the increase in homeowners with mortgages and the topping-up of existing mortgages. The active use of borrower-based measures has reduced the share of high LTV, DTI, and DSTI mortgages, but the cluster of mortgages right below regulatory limits is a potential source of vulnerability.16 There has also been an increase in mortgages with maturities extending beyond borrowers’ retirement age.

While the macroprudential stance is broadly adequate from a financial stability point of view, the authorities could consider introducing additional macroprudential policy measures to address housing market vulnerabilities if imbalances persist.17 As recommended in the 2021 IMF Staff Report and the ESRB, the NBS could consider introducing capital-based measures on mortgage exposures, including minimum risk weights, to strengthen banks’ resilience to adverse housing market shocks. The NBS could also explore applying the sectoral systemic risk buffer (SyRB) to target systemic risks from mortgage loans under the new Capital Requirements Directive (CRD V) flexibility, after conducting a cost-benefit analysis. To address pockets of vulnerability, such as the concentration of loans below regulatory limits and the rise in loans with maturities beyond retirement age, the authorities could consider adjusting borrower-based measures. For example, additional amortization requirements for new mortgages at the regulatory ceilings could reduce their clustering right underneath those ceilings. The proposal of a gradually falling DTI limit as borrowers approach retirement age would help limit overindebtedness of vulnerable pensioners, though it will be important to monitor its implementation and ensure that it does not reduce excessively access to credit to potentially credit-worthy older borrowers.

Addressing housing supply shortages and reforming property taxation could help alleviate property market pressures. Over the past decade, the overcrowding rate in Slovakia has declined but remains significantly higher than the EU average, especially among the younger population.18 The inflow of refugees might also raise housing demand. Improving housing supply will have social benefits as well as dampen house price growth and associated vulnerabilities. In that regard, the recently approved construction and spatial planning laws, which aim to simplify the construction code, shorten the lengthy building permit process and reduce bureaucracy are welcome. Developing the rental market could also help contain house price inflation. Finally, raising Slovakia’s property taxes would strengthen public finances and dampen overheating pressures.

Authorities’ Views

The authorities broadly concurred with staff’s assessment of housing market risks. They are open to expanding their macroprudential toolkit with capital-based measures, such as minimum risk weights, but a thorough cost-benefit analysis would be needed, especially given the sizable differences in mortgage risk-weights among IRB banks. They plan to introduce age-related DTI limits to address the rise in mortgages with maturities extending beyond retirement age. Their analysis suggests that the early adoption of such a precautionary measure would help limit excessive indebtedness and reduce the accumulation of risks, with only a slight reduction of credit growth. They also highlighted recent regulatory changes to bolster housing supply flexibility.”

From the IMF’s latest report on Bulgaria:

“Despite recent measures, credit risk could increase, including due to spillovers from the war. During the pandemic, macroprudential measures provided banks room to manage a possible deterioration of loan quality without limiting credit flows, while broader measures supported borrowers’ repayment capacity. Nominal credit to households is now growing at a rapid pace, driven by housing mortgages. To prevent the buildup of new risks, the BNB appropriately announced gradual increases in the countercyclical capital buffers (CCCB), up to 1.5 percent in 2023 from 0.5 percent currently. Possible further increases will need to consider the strength of the recovery to ensure that credit to corporates remains sufficiently available to support private investment. The introduction of borrower-based measures could also be considered if signs of overheating in the real estate market were to emerge. Supervisors should continue to ensure that banks monitor asset quality for possible deterioration and proactively resolve NPLs, as credit risks may rise with the lagged impact of withdrawing COVID-19 related support, the impact of surging commodity prices and supply-chain disruptions on corporates, rising interest rates, or the emergence of imbalances in the housing market.”

On cross-country:

• The World’s Bubbliest Housing Markets Are Flashing Warning Signs. Global monetary tightening is squeezing homebuyers, adding risks that a slowdown could ripple through the economy. – Bloomberg
• The property industry has a huge carbon footprint. Here’s how to reduce it. Some buildings should be retrofitted, others torn down – The Economist

On the US:    

• America Faces a Housing Bust. All ingredients seemed in place at 2022’s start for a continued housing boom, but now the market has priced itself for a sharp reversal – Wall Street Journal
• The State of the nation’s Housing 2022 – Joint Center for Housing Studies of Harvard University
• Is another housing crash on the way? – The Economist
• Investors’ Housing Bets Are on Shaky Foundations. Cash has been pouring into residential property on the assumption that an unprecedented run up in rents will continue – Wall Street Journal
• We’re Already Seeing the Stock Market Selloff Spill Into the Housing Market. It’s especially notable in places where stock-based comp is significant. – Bloomberg  
• U.S. labor market appears to cool; homebuilding slumps as rates surge – Reuters
• US Housing Starts Decline to Lowest Level in More Than a Year. May construction fell to 1.55 million pace after April surge. Builder backlogs remain elevated even as sales decrease – Bloomberg
• Housing Just Hit a Wall. What’s Next for Prices, Brokers, and Builder Stocks. – Barron’s
• Work From Home and the Office Real Estate Apocalypse – SSRN
• The Size and Census Coverage of the U.S. Homeless Population – NBER
• Housing’s Slowdown Has Economy on the Edge. News of a cooling housing market might be a relief to some, but we’ll be living with the aftereffects for a long time to come. – Bloomberg
• Hot Housing Market Keeps Home Foreclosures at Bay. Robust home prices and government relief programs are giving financially squeezed homeowners options to avoid foreclosure – Wall Street Journal 
• US House Prices Are Likely to Drop as Rates Rise, Capital Economics Says – Bloomberg
• The Left-NIMBY meltdown. It’s getting harder to pretend that blocking new housing helps poor people. – Noah Smith
• Cancel Zoning. If we want to fix the housing-affordability crisis, segregation, and sprawl, zoning must go – The Atlantic
• In Pursuit of Affordable Housing: The Migration of Homebuyers within the U.S.—Before and After the Pandemic – Freddie Mac

On China

• China’s Once-Sizzling Property Market Has Started to Cool. New home prices in China have fallen, and would-be buyers are thinking twice. That’s bad news for the overall economy. – New York Times
• Chinese Developer Accepts Wheat, Garlic as Payment to Woo Buyers – Bloomberg
• China’s Property Slump Is a Bigger Threat Than Its Lockdowns. The worst decline on record could hold growth below 4% for the rest of the decade. – Bloomberg

On other countries:  

• [Australia] Sydney house prices still 20% above pre-pandemic levels despite rising interest rates. Economists say while property prices could come down by up to 20%, affordability has ‘never been worse’ – The Guardian
• [Australia] Sales slow down in Sydney’s suburbia-on-sea. After a period of rising prices, homebuyers are starting to get more for their money, while some sellers lose out – FT
• [Canada] Distressed Deals Pile Up in Canada’s Once-Booming Housing Market. Prices are falling in some of the urban markets that had the biggest increases over the past two years. That’s leading to broken and renegotiated deals. – Bloomberg
• [Israel] Israel lawmaker seeks larger mortgage loans as home buyers priced out – Reuters
• [Sweden] Sweden’s Housing Bubble Deflates as Realtors Sound Alarm – Bloomberg
• [United Kingdom] Are the Days of UK Property Booms and Busts Over? Tougher mortgage regulation in 2014 sought to contain overstretched buyers. Its effectiveness is about to be put to the test. – Bloomberg
• [United Kingdom] Bank of England to Get Rid of Mortgage Affordability Rules. UK central bank will end the affordability test from Aug. 1. The BOE raised the benchmark interest rate last week to 1.25%. – Bloomberg

From IMF’s latest report on Greece:

“There are nascent signs of emerging systemic vulnerabilities. Residential real estate prices have rebounded by almost 25 percent since 2018, accompanied by a significant increase in price-to-rent and income ratios. Commercial real estate prices have also rebounded, albeit to a weaker extent. Household credit expansion has surpassed disposable income growth, with demand for mortgage and corporate loans expected to mirror the recent rise in new lending to households and corporates, although after a period of pronounced private sector deleveraging (…). Model-based analyses suggest positive private sector credit gaps for Greece. A further acceleration of credit growth is anticipated from NGEU loans being channeled through the banking system.”

From the IMF’s latest report on Qatar: