Showing posts with label Global Housing Watch. Show all posts
Sunday, June 19, 2022
From a new working paper by Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh:
“We study the impact of remote work on the commercial office sector. We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic. We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate. We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.”
From a new working paper by Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh:
“We study the impact of remote work on the commercial office sector. We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic. We show that the pandemic has had large effects on both current and expected future cash flows for office buildings.
Posted by 9:29 AM
atLabels: Global Housing Watch
From a new paper by Stephen J. Redding:
“Economic activity is highly unevenly distributed within cities, as reflected in the concentration of economic functions in specific locations, such as finance in the Square Mile in London. The extent to which this concentration reflects natural advantages versus agglomeration forces is central to a range of public policy issues, including the impact of local taxation and transport infrastructure improvements. This paper reviews recent quantitative urban models, which incorporate both differences in natural advantages and agglomeration forces, and can be taken directly to observed data on cities. We show that these models can be used to estimate the strength of agglomeration forces and evaluate the impact of transportation infrastructure improvements on welfare and the spatial distribution of economic activity.”
From a new paper by Stephen J. Redding:
“Economic activity is highly unevenly distributed within cities, as reflected in the concentration of economic functions in specific locations, such as finance in the Square Mile in London. The extent to which this concentration reflects natural advantages versus agglomeration forces is central to a range of public policy issues, including the impact of local taxation and transport infrastructure improvements. This paper reviews recent quantitative urban models,
Posted by 6:52 AM
atLabels: Global Housing Watch
Friday, June 17, 2022
On cross-country:
On the US:
On other countries:
On cross-country:
On the US:
Posted by 5:00 AM
atLabels: Global Housing Watch
Thursday, June 16, 2022
From the IMF’s latest report on Denmark:
“Macrofinancial vulnerabilities remain elevated. Household leverage remains high by international standards and housing prices rose faster than incomes through the pandemic. Furthermore, a sizable share of newly-originated loans were interest-only loans, some with amortizing options that could be exercised by lenders if housing values fall. In addition, homeowners are increasingly taking out variable-rate mortgage loans and repaying fixed-rate loans which naturally increases the interest-rate sensitivity of homeowners. Thus, a domestic or regional house price correction, triggered possibly by a reassessment of fundamentals or a tightening of global financial conditions could reverberate in Denmark, weighing on the real estate market, private consumption, and investment. The impact could be amplified by the high interconnectedness of mortgage credit institutions (MCIs), pension funds, and insurance companies given their dependence on the housing sector. While the net impact is uncertain, high, and persistent inflation could weigh on bank profitability including through lower aggregate demand, or if highly-leveraged households cannot service their debt due to variable-rate mortgages resetting at higher rates.
(…)
They recognize that macrofinancial risks mainly stem from the housing market in combination with high household leverage and an increasing share of risky mortgages.
(…)
Macrofinancial vulnerabilities persist due to high leverage and an increasing share of risky mortgages. Following a prolonged period of low interest rates, high debt, combined with illiquid assets (concentrated in real estate via housing and pension assets), exposes households to price and interest rate shocks that can spill over to aggregate demand. Furthermore, many households have recently opted for interest-only mortgages with options for lenders to request amortization if housing prices fall, which could amplify adverse shocks. Many of these households would face markedly higher debt-servicing costs were they required to amortize their mortgages (DN 2021). A sharp revaluation could harm highly-leveraged households, particularly those who purchased in overvalued urban areas and low-income households. These vulnerabilities are compounded by the large and growing proportion of variable-rate mortgages, which are increasingly used to repay fixed-rate loans, exposing homeowners to higher interest rate risk. Moreover, MCIs and pension and insurance companies are highly interconnected and dependent on the health of the housing sector.
(…)
These developments warrant tightening prudential tools. Macroprudential tools aim to increase macrofinancial resilience and contain excessive risk taking. Staff recommend that new mortgages extended to highly-leveraged households be subject to minimum down-payment requirements or mandatory amortization until a minimum equity share is reached, regardless of maturity and type of interest rate fixation. As valuation-based measures can be less binding when housing prices appreciate rapidly (Chen et. al, 2020), the limits applying to ”highly-leveraged” borrowers should become binding if either DTI or loan-to-value (LTV) limit is breached, instead of the current joint requirement. Based on borrowers’ riskiness, differentiated limits on income-based measures and LTVs for interest-only and floating-rate mortgages should also be considered. In an environment of increasing mortgage rates, the “growth area guidelines” should be extended beyond Copenhagen and Aarhus and debt-service-to-income (DSTI) caps should be considered to protect against liquidity shocks. The proposed risk-based prudential framework should facilitate calibration of these measures, to account for risk differentiation across groups, e.g., first-time home buyers to improve affordability. National legislation should include borrower-based tools (limits on LTVs, DTIs, and DSTIs) in the policy toolkit (FSAP 2020).
To improve affordability, it is important to address features of the tax code and housing supply constraints that create price pressures. Incentives for the adequate supply of housing should be reviewed. Moreover, rent controls in Denmark are pervasive relative to peer countries. Once inflationary pressures abate, these should be relaxed to stimulate the rental market, while protecting the most vulnerable. Mortgage interest deductibility should be reduced as in other advanced economies, as this incentivizes larger housing purchases and higher indebtedness, pushing up prices (Gruber et. al, 2019). Linking property taxes to market valuations should be prioritized.”
From the IMF’s latest report on Denmark:
“Macrofinancial vulnerabilities remain elevated. Household leverage remains high by international standards and housing prices rose faster than incomes through the pandemic. Furthermore, a sizable share of newly-originated loans were interest-only loans, some with amortizing options that could be exercised by lenders if housing values fall. In addition, homeowners are increasingly taking out variable-rate mortgage loans and repaying fixed-rate loans which naturally increases the interest-rate sensitivity of homeowners.
Posted by 12:07 PM
atLabels: Global Housing Watch
Friday, June 10, 2022
From the Bank of Canada:
“The vulnerability associated with elevated house prices (Vulnerability 2) increased further over the past year. Key developments in the housing market—strong demand relative to supply, driven partly by an increasing share of investors; prices reaching all-time highs in most regions; and expectations that these price increases will continue in most major cities—point to further imbalances in prices compared with a year ago.
A large misalignment of house prices relative to longer-term fundamentals could lead to an abrupt price correction in the future. Such a correction can, in turn, bring on financial stress for households because housing often represents their largest asset (see “A large decline in household income and house prices”).
It is too early to tell whether the recently observed decrease in resale activity and prices will be temporary or is the start of a deeper, lasting decline. A sudden reversal of the influx of housing investors seen during the pandemic could amplify downward pressure on prices (Box 2).
After months of exceptionally strong activity in the housing market, resales slowed considerably in March and April 2022 (Chart 7). Until the early months of 2022, demand—including from investors—was remarkably robust, supported by a desire for more housing space, record-low mortgage rates and the accumulation of extra savings. Resales are expected to soften as borrowing rates rise and the pandemic-induced demand for more housing space wanes. Recent monthly data reveal a large decline in resale activity. This could reflect a temporary echo effect from some homebuyers making their purchases earlier to avoid the latest mortgage rate increases, or it could signal the beginning of the end of the pandemic upswing.
Growth in house prices has been vigorous and regionally broad-based. In April 2022, house prices were up 24% nationally compared with April 2021, and up 53% relative to April 2020. Despite house prices increasing in nearly all areas, suburbs have experienced the strongest growth—as seen in the Toronto and Montréal regions (Figure 1).15 This dynamic is consistent with the pandemic-induced shift in preferences for more housing space, which is more affordable and widely available in suburban and rural areas than it is in city centres.
Part of the exceptional increase in house prices observed since the start of the pandemic may have reflected extrapolative price expectations. This happens when people come to expect that house prices will rise in the future simply because they have risen in the past. In such a situation, homebuyers may rush into the market out of fear of missing out or may hope to realize a sizable capital gain. Under these conditions, housing demand and prices can then become disconnected from underlying fundamentals, putting prices at risk of a correction in the future. Extrapolative expectations, particularly among investors, could amplify and accelerate price declines if a house price correction were to occur. Such a correction could dampen economic activity not only through confidence effects but also because it reduces household wealth and restricts access to credit (see “A large decline in household income and house prices”). Although house prices declined in April 2022, it is too early to tell whether this is the beginning of a substantial correction in prices.
Before the tightening of monetary policy in March, extrapolative expectations appeared to have broadened. The Canadian Survey of Consumer Expectations conducted in February revealed that many Canadians were expecting house prices to increase substantially over the next year. In fact, this is the highest rate for this response since the Bank introduced this survey question in 2016. These elevated expectations also appeared to be broadening. For the first time, the Bank’s House Price Exuberance Indicator characterized house prices in most major Canadian cities as exuberant in the first quarter of 2022 (Chart 8).16 However, these indicators were collected before the slowdown in housing activity and price growth in April. It remains to be seen whether data for the second quarter will support the same conclusion.
The share of Canadians buying homes as investment properties grew in 2021. The increased presence of investors in the real estate market can amplify the vulnerability associated with elevated house prices (Box 2).
Box 2: Vulnerabilities associated with investors in residential real estate
In an environment of low mortgage rates and rapid increases in house prices, expectations of a large capital gain can make houses an attractive asset for investors. For the purpose of this analysis, investors are defined as existing mortgage holders who obtain an additional mortgage to purchase a property. In 2021, they made purchases at a faster pace than first-time or repeat homebuyers. Investors accounted for over 22% of mortgaged purchases in the fourth quarter of 2021, up from 19% in 2019 (Chart 2-A).17
Investors are increasingly extracting equity from their existing properties to support new purchases. The share of investors who took out at least $5,000 in equity in the three months before they purchased an investment property rose substantially since the start of the pandemic (Chart 2-B). The amount of equity these investors took out through home equity lines of credit or mortgage refinancing also noticeably increased. For about one-third of these investors, the equity extracted was equal to or greater than the down payment on their subsequent purchase. This proportion is up from just over one-fifth in 2019. The increased use of equity gains to finance purchases highlights the feedback loop between rapid gains in house prices and the stronger demand for housing that investors generate.
Investors can amplify house price cycles. Investors can play an important role in the housing market if they make their property available to renters on a long-term basis. But investors can also increase vulnerabilities linked to higher house prices:18
Although investors typically earn more income than non-investors, they tend to have higher loan-to-income ratios, once all the mortgages they hold are accounted for, and higher debt servicing costs.19, 20 If an income shock occurs—whether a reduction in employment or rental income because, for example, some tenants become unemployed—highly leveraged investors may need to sell one or more of their properties to recover some liquid assets. Although investors may not be considered as financially vulnerable as non-investor households given the amount of equity they have tied up in real estate, investors could intensify the effect of an economic slowdown by adding downward pressure on housing demand and prices.”
From the Bank of Canada:
“The vulnerability associated with elevated house prices (Vulnerability 2) increased further over the past year. Key developments in the housing market—strong demand relative to supply, driven partly by an increasing share of investors; prices reaching all-time highs in most regions; and expectations that these price increases will continue in most major cities—point to further imbalances in prices compared with a year ago.
A large misalignment of house prices relative to longer-term fundamentals could lead to an abrupt price correction in the future.
Posted by 8:24 AM
atLabels: Global Housing Watch
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