The Unassuming Economist

From the IMF’s latest report on Israel:

“Furthermore, the reversal of several measures was needed to address emerging risks in the housing market. The rapid rise in housing prices—due to limited supply and rapid mortgage growth—rekindled concerns of price misalignment. With the house price-to-income and price-to-rent ratios at high levels, the BoI has appropriately reversed the increase in the LTV limit and the relaxation of an additional Tier 1 capital requirement for housing loans. Further tightening of macroprudential measures—e.g., lowering the debt-service-to-income cap from its current 50 percent ratio—could help stem banks’ exposures to the housing market and prevent potentially unsustainable borrowing.”

Addressing housing affordability should be high priority for the government. Given strong population growth and little growth in housing starts since 2019, investment in housing needs to accelerate significantly to curtail the existing housing shortage. In October, the government announced a plan for construction of 280,000 homes and approval of 500,000 homes in 2022–25. In December, to discourage investors in favor of first-time residence buyers, parliament increased the residential purchase tax on investors from 5 to 8 percent for the next 3 years. Further structural measures to ease housing supply—reforming property taxes, increasing land auctions, streamlining building regulations, allowing fast-track approvals of mixed-use development—should also be advanced.

(…)

Authorities’ views. The authorities agreed that banks’ strong balance sheets and macroprudential easing allowed the financial system to support the economy during the pandemic. The authorities insisted that supply-side bottlenecks in the housing market need to be addressed and were less concerned about banks’ exposures to housing market risks due to conservative LTV ratios and capital buffers. They noted that the committee reviewing the financial supervision structure was just commencing its work. Nonetheless, some committee members indicated a preference for retaining the current bank supervision architecture under the central bank given the experience of effective financial stability coordination during the pandemic.

(…)

Improving the supply of affordable housing. Promoting public housing closer to economic centers, targeted to disadvantaged groups (e.g., using the mixed neighborhood models of the UK and US) would allow low-income workers better proximity to available jobs. This would require addressing the existing severe housing supply shortages. The government’s 2022–25 plan to increase the stock of available housing, which envisages additional 1.2 percent of GDP in spending, is a step in the right direction. It includes support for new schools, sewage, and other related infrastructure. However, strengthening municipal incentives to issue permits for residential housing also requires tax and land reforms, and potentially, a municipal reform. Less costly options to provide affordable housing farther away from economic centers carry trade-offs with the cost of better transport and digital infrastructure to ensure physical and digital accessibility to the available jobs.”

From a VoxEU post by Rebecca Diamond and Enrico Moretti:

“Over the last three decades there has been increased polarisation in income among US communities, but how the standard of living varies across communities is not clear. This column uses transaction data for three million households to examine standards of living – in terms of consumption – in cities across the US by income and education, and how they relate to the local cost of living. For college-educated households, expensive cities offer incomes high enough to offset the higher cost of living and taxes. For less-educated households, expensive cities offer a standard of living that is systematically below that in affordable cities.

Over the last three decades there has been increased polarisation in income among US communities (Austin et al. 2018), while economically vibrant cities such as New York, San Francisco, Boston, and Seattle have experienced fast increases in mean household income. At the same time, less dynamic local labour markets have experienced more limited increases in income and, in some cases, even declines (Moretti 2012). What is less clear is how the actual standard of living of residents varies across communities. The standard of living of residents of a city – which is the amount of consumption households are able to purchase – depends both on the income level that residents can expect there and the local cost of living. 

While we know that large, expensive cities tend to have jobs that offer higher nominal earnings and small, affordable cities tend to have jobs that offer lower nominal earnings, we know little about where standards of living are highest. Are residents of dynamic metro areas better or worse off in terms of consumption compared to residents of smaller, economically struggling communities? This lack of information is surprising, because the amount of consumption is arguably a key component of economic wellbeing. There is limited systematic empirical evidence on the differences in consumption across cities and how they relate to local cost of living. The paucity of evidence likely reflects the lack of datasets that can measure consumption and are large enough to allow for a detailed geographical analysis. 

In a new paper, we provide the first estimates of standard of living by city for households in a given income or education group and study how they relate to local cost of living (Diamond and Moretti 2021). Our main data source is a representative sample of three million US households’ linked bank and credit card transactions in 2014. We use these to measure the value of consumption expenditures as we observe essentially all debit and credit card transactions, cheque and Automated Clearing House (ACH) payments, and cash withdrawals conducted every day. Our consumption data are comprehensive and include virtually all purchases conducted by individuals in our sample. We quantify how consumption in expensive cities compares with consumption in affordable cities for a given income or educational group. 

To measure local prices, we build consumer price indexes that vary by city and income group. Our baseline price index is an index which mimics the index used by the US government to estimate the official national consumer price index (CPI). It is a weighted average of the local prices of items consumed by the average household with income-specific weights reflecting the importance of each item in the bundle for consumers of a given income group. Our data include all items consumed by households, from housing (the most important item) to groceries, restaurants, and other parts of the typical family budget.¹    

The price indexes point to large differences in cost of living across cities, especially for low-income households. The overall cost of living faced by low-income households (post-tax income less than $50,000) in the most expensive city (San Jose, CA) is 49% higher than in the median city (Cleveland) and 99% higher than in the most affordable city (Natchez, MS). By contrast, we uncover significantly smaller geographical differences for high-income households (post-tax income greater than $$200,000). 

Using the prices indexes, we measure the standard of living that low- and high-skill households can expect in each US city and how it varies as a function of local prices. We focus on three skill groups, based on the schooling level of the household head: (i) four-year college or more, (ii) high school or some college, (iii) less than high school. 

Table 1 shows our findings for households where the head has a college degree or more for the 50 largest cities in the US. “

On cross-country:

• A re-examination of housing bubbles: Evidence from European countries – Economic Systems

On the US:    

• Are U.S. Housing Markets Hot, Hot, Hot? – SSRN
• Vacant Homes Everywhere. Census surveys reveal U.S. vacancy rates, but applying the data to a home search or to social issues is complex. – New York Times
• Wells Fargo Rejected Half Its Black Applicants in Mortgage Refinancing Boom. Fewer than half of Black applicants were approved by the biggest bank mortgage lender – Bloomberg
• Housing Market Interventions and Residential Mobility in the San Francisco Bay Area – San Francisco Fed   
• How Do Homeowner Experiences Vary by Race and Ethnicity? Neighborhood Differences between Hispanic and White Homebuyers – San Francisco Fed   
• The Fed Hits the Housing-Market Wall. There are two ways policy makers could ease stagflation for consumers and industry players. Neither one is without serious challenges. – Bloomberg
• Rent-Control Measures Are Back as Home Rents Reach New Highs. Laws on how much landlords can raise prices are debated in more than a dozen states – Wall Street Journal
• How the War on Sprawl Caused High Housing Prices. Since the 1960s, planners have convinced many state and regional governments to limit the physical spread of urban areas. – Reason
• The housing market’s key metric just took an ugly turn for homebuyers – Fortune
• Introducing “Housing Finance Watch” and “Inflation Watch” – American Enterprise Institute
• The Great Housing Inflation as a Long-Term Policy Failure. High prices of homes and rental apartments have very little to do with today’s general inflation, but reflect decades of perverse policies that hurt both renters and aspiring homeowners. – The American Prospects
• People Deserve to Know Their Houses Are Going to Burn. The old way of insuring against fires isn’t working anymore. – The Atlantic
• Housing Affordability Conditions Wane in January 2022 – National Association of Realtors
• The More Density We Build, the More Valuable “Neighborhood Character” Will Be – Freddie deBoer
• As Rents Soar, States Take Aim at Local Zoning Rules. Local officials, however, say they should decide what gets built where. – PEW

On China

• China Home Prices Drop Faster as Slump Shows No End in Sight. New home prices fell for a sixth straight month in February. Easing measures have failed to arrest a decline in sales – Bloomberg
• Chinese house prices slip lower despite policy loosening. Real estate sector is still struggling but there are signs of recovery in wider market – FT

On other countries:  

• [India] Coming UBS Lists Top Real Estate Bets As It Sees Mumbai ‘Construction Boom’ Ahead – Bloomberg
• [New Zealand] FOMO Turns to FOOP in New Zealand’s Cooling Housing Market. Credit squeeze and rising borrowing costs put brake on demand. House prices expected to fall by as much as 10% this year – Bloomberg

From Freddie deBoer:

“My relationship to the YIMBY movement is a little complicated. One issue is a tendency to oversimplification. It’s understandable; the NIMBY position really is so noxious and the stakes are so high that there’s a natural desire to speak in black and white. But here’s a point that I don’t see engaged with much: while the zoning and regulatory hurdles are the major impediment to more building and lower costs, I suspect that even after major reform we won’t see immediate levels of building at the scale YIMBYs want and that we need. I suspect that market forces, inertia, and status quo bias will slow new building (and attendant badly-needed housing cost reductions) more than assumed. Tearing down regulatory barriers is essential, but that by itself won’t turn Pacific Heights into Neo-Tokyo.

I think one reason is that, as more density gets built, neighborhoods that preserve “neighborhood character” – that is, that retain the kind of low density lifestyles that characterize many expensive urban neighborhoods – will get attendantly more expensive. And that will make new building less economically attractive in pure market terms. If the luxury premium that you get from each resident is high enough, you can maintain a profit advantage compared to fitting even a great many more tenants into the same space. Rich people will pay a whole lot to keep other people out.

So if you look at the kind of walkable, low-density Brooklyn brownstone lifestyle a lot of people see as enviable, you’ve got places like Boerum Hill, Fort Greene, Clinton Hill, Park Slope…. These places are expensive for a variety of reasons, but certainly one of them is lower population density and the smaller-scale housing that affords. (You can see this in a neighborhood like Bedford-Stuyvesant, where there’s both very wealthy people and quite poor – and the easiest way to tell which parts are which is to note how dense the housing is.) Right now Park Slope’s large buildings are mostly found on its western edge on 4th Avenue and immediately closest to Prospect Park. In between is a sea of townhouses and other forms of low-density buildings. If we were to enable zoning reform to permit denser building in the streets that are now almost exclusively brownstones, we’d raise the housing stock and create some desperately-needed downward pressures on rents. But we would also find that the kind of bourgie people who would have paid $3 million for a house there would instead start competing for that “small town in a big city” lifestyle in those other neighborhoods, and this competition would make the existing housing stock even more expensive, thus undercutting the financial incentive to tear down low-density housing and put up high rises.

It’s also the case that, since there’s a relationship between housing density and income, the people who would be able to fight against new building most effectively would be those in low-density, even in a much-reformed regulatory environment. Rich people have multiple ways to get what they want, including in a freer housing market. Affluent people can just generate more noise and make life harder on developers even absent the most onerous zoning barriers. Dollars talk. (I had an ex-girlfriend whose family lived in a tony seaside Connecticut town; when someone was going to sell a parcel of land to put up another house on their block, the local residents simply split the cost and bought the lot so that no new building would happen.) And so you can easily imagine a future in which we pass zoning reform and yet Park Slope remains Park Slope, but where a neighborhood like Prospect Lefferts Garden – 75% Black, median income under $40,000, with a lot of single-family housing and a great deal of gentrification anxiety – sees sudden intense building and a resulting change in the demographic composition of the neighborhood. That would enflame precisely the sensitivities that we see in working-class communities of color when new building is proposed. And while I find resistance to such new building misguided, those of us who want to build more have to acknowledge that it’s an ugly thing if rich white people can keep new developments off their block but poor people of color can’t.

(Here’s an NBER paper about the costs of low-density housing such as Brooklyn brownstones, if you’re interested.)”

Continue reading here.

On cross-country:

• What happened to global house prices in 2021? – Knight Frank
• Demographia International Housing Affordability 2022 – Demographia

On the US:    

• The impact of Treasury’s pilot program on stemming the tide of dirty money into US real estate – Brookings  
• Early signs of Russian pullback in real estate – Axios
• The Threat of Environmental Hazards to the Rental Stock – Harvard Joint Center for Housing Studies
• Home mortgage and insurance systems encourage development in climate-risky places, and we all pay the price – Brookings
• U.S. Housing Wealth Skewed Even More Toward Affluent Over Past Decade. From 2010 to 2020, about 71% of increase in housing wealth was gained by high-income households, says National Association of Realtors report – Wall Street Journal
• Stagflation Is Already Here in the Housing Market. Soaring prices and low inventory are causing headaches for homebuilders and buyers but benefiting owners — and therein lies the Fed’s predicament as it seeks to lower inflation. – Bloomberg  

On China

• China’s Banking Regulator Welcomes Home Price Adjustments. Guo says current moves are good as long as not too volatile. Home prices have fallen for five months amid industry crisis – Bloomberg
• Shanghai homebuyers looking to capitalise on eased credit policies have to act fast amid expectations of price rise. Eased credit has prompted potential homebuyers to actively chase flats, property agent says. Average price of secondary homes sold last month was 0.5 per cent higher than in January, and 8.5 per cent higher year on year – South China Morning Post

On other countries:  

• [Norway] Coming of Age: Renovation Premiums in Housing Markets – SSRN
• [Singapore] Pricey Singapore rents go through the roof even as population dips – Reuters
• [United Kingdom] Help to Buy’s legacy: higher prices and richer builders. Now is a good time to pick over the bones of the UK government’s controversial equity loan scheme – FT
• [United Kingdom] Goodbye Londongrad: Russian Oligarchs Put Pressure on U.K. Property Market. Russian oligarchs stormed London’s high-end property market. Now they are under pressure and so is the city’s real-estate sector. – Wall Street Journal
• [United Kingdom] Cost versus availability of loans: which matters more for mortgagors? – Bank of England