The Unassuming Economist

Speech by Governor Constantinos Herodotou, Central Bank of Cyprus:

“The fact that not all euro area countries receive relevant warnings and recommendations by the ESRB is an indication that the Residential Market in the euro area is characterised by heterogeneity. In the upper right quartile of the chart, we find a number of countries that registered an accumulated increase in residential property prices of at least 25% in the last three years.  Other countries have recorded accumulated growth as low as 5%. 

Using as a starting point the observed heterogeneity and by analysing the experiences of several countries, we can draw certain broad conclusions on the effectiveness of the macroprudential toolbox.

The design of Borrower and Capital Based Measures is a decision of authorities. For example, based on information from the ESRB, Belgium introduced a Loan-to-Value on both owner-occupied and buy-to-let properties. Cyprus, in order to deal with a specific sectoral exposure, further to the Loan-to-Value cap, recently introduced an even stricter Loan-to-Value for luxurious properties. However, by observing the real estate cycles registered in a number of countries, it is evident that even the idiosyncratic design of these measures does not always stop real estate cycles from materialising. The Netherlands and Slovenia are examples of countries that have recorded vulnerabilities despite the implementation of such measures.

Analysis performed at the Central Bank of Cyprus verifies this observation.

Using an econometric model, we explain the growth rates of housing loans and house prices considering the implementation of macroprudential measures.

The analysis indicates that the Loan-to-Value ratio seems to be effective in containing housing loans, for 10 out of 12 countries in our sample and effective in containing house prices in only in 3 out of the 12 cases. Income based measures (such as Debt-Service-to-Income) and Capital Based Measures were found to be effective in around half of the countries that use them.

We can therefore conclude, that there is no “one-size-fits-all” type of macroprudential tool.

One of the reasons why macroprudential tools are not always effective, could be that vulnerabilities are not necessarily driven by the credit cycles. In the cases examined, it is evident, that credit for house purchases is not always correlated with the trends in housing prices. For example, Slovenia and the Netherlands experienced a build-up in vulnerabilities in the residential real estate market without a corresponding excessive growth in housing loans.

Structural factors could explain the above observation as they affect both demand and supply of housing. More particularly,

*Net migration and population growth are factors that have continued to put pressure on house prices in countries such as Luxembourg, which experienced net population growth of 13,6% in 2020. Countries with low vulnerabilities in the housing market, such as Greece, experienced a negative population growth.

*Strong preference for home ownership could also be a driving factor for the observed vulnerabilities in Luxembourg and Slovakia. Homeowners represent 92,9% of the population of Slovakia whereas in France, a country with low identified real estate vulnerabilities,  homeowners represent 65,2%. 

From the above examples, we can conclude that in designing a macroprudential tool, idiosyncratic structural factors need to be identified and accounted for.”

Monetary policy also plays a role. Although macroprudential policy is the first line of defence, the ECB has recognised that Financial Stability is a precondition for price stability. It has also been acknowledged that monetary policy, can, in principle, influence asset prices such as real estate.

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To sum up, the euro area residential real estate market is characterised by heterogeneity. Vulnerabilities in the real estate market are not necessarily cyclical in nature but structural factors also play a role. A single policy or measure cannot be enough to tackle the materialisation of risks from the residential market, although macroprudential authorities, as the first line of defence, have a significant toolbox in their hands, that can help in containing these risks.”

On cross-country:

• ECB ‘cannot ignore’ house price surge in inflation assessment, says executive. Property boom adds to risks of acting too late to tighten monetary policy, says Isabel Schnabel – FT
• Surging housing costs boosting overall euro zone inflation: ECB – Reuters
• Watchdog sounds alarm on financial risks of Europe’s property boom. Banks at risk from soaring prices, loosening lending standards and rising household debt levels – FT and European Systemic Risk Board
• Germany and Austria told to curb boom in home prices – Reuters
• The true cost of empty offices. Property investors are sitting on big losses – The Economist
• The Economics Implications of House Price Capitalization: A Synthesis – London School of Economics
• Inflation may push more families to become Airbnb hosts, chief says. Lodging platform touts ‘economic opportunity’ while investors worry about limited supply as travel rebounds – FT
• Private Cities: Implications for Urban Policy in Developing Countries – World Bank

On the US:    

• How to fix America’s broken housing systems – Brookings
• Housing Supply May Remain Constrained – Bloomberg
• Lacker on Rising Rates and Housing Market. Rising interest and mortgage rates will put a damper on housing demand, and also potentially on the supply of new homes, according to former Richmond Fed President Jeffrey Lacker. – Bloomberg
• Lessons from a Modern Master of Low-Rise Housing. Cities looking to boost density and affordability should look to the work of architect Louis Sauer, who designed stylish modernist housing in the 1960s and ’70s. – Bloomberg
• Why your rent is going up – Axios 
• Renting a Home Is Even Harder Than Buying One in Unrelentingly Hot U.S. Market. Rental prices for single-family homes grew 7.8% in 2021, an all-time high, according to CoreLogic. – Bloomberg
• Blackstone expands further into rental housing in the United States. The private equity firm said it would acquire Preferred Apartment Communities, a real estate investment trust, for $6 billion as it seeks a hedge against inflation. – New York Times
• U.S. Housing Affordability Worsens. Median sales price for single-family existing homes was higher in fourth quarter versus year ago in 181 of 183 metro areas – Wall Street Journal
• Out-of-Town Home Buyers Will Pay 30% More Than Locals in Hottest U.S. Markets. In cities including Nashville, Philadelphia, Atlanta and Miami, people migrating from elsewhere are willing to pay way more than asking price. – Bloomberg
• Real-Estate Investors Head South, Bid Up Sunbelt Apartment Buildings. Dallas and Atlanta see more investment than other U.S. cities, as landlords chase job growth – Wall Street Journal
• Renters across US face sharp increases – averaging up to 40% in some cities. Americans face having to move or pay much bigger slice of income to stay in their homes as prices outstrip wages – The Guardian
• Remote Work Opens Up Cheaper Housing Options. House hunters are searching to move from expensive larger cities to smaller cheaper ones. – New York Times 
• How the Federal Government’s policies are crowding out lower income Americans out of the housing market. And how federal agencies and regulators are in the process of doubling down on failed policies, putting low-income and minority borrowers needlessly in harm’s way – AEI
• Where Did All the Homes Go? Here Are the Cities With the Most Places for Sale—and the Ones With the Fewest – Realtor.com
• U.S. mortgage rates jump to two-year high, further squeezing buyers – Reuters
• San Francisco is the latest city to consider tackling its housing crisis by taxing empty homes – Quartz
• Amid a housing crisis, renters challenge firms they say are being exploitative – NPR
• With evictions on the rise, House Democrats team up to push new housing protections – NPR   
• Natural disasters can wipe out affordable housing for years. And when communities lose affordable housing, it’s harder for businesses—and the entire economy—to recover from those disasters. – Fast Company
• Landmark housing discrimination settlement with Fannie Mae sets key precedent – Reuters 
• Home prices: high, but not rising – FT 
• Buying a Home Is as Frustrating as You Think It Is. Housing prices continue to skyrocket as potential buyers feel increasingly insecure about their personal finances. It’s easy to feel a little hopeless. – Bloomberg
• Is GSE Reform Dead? – Harvard Joint Center for Housing Studies
• Will Rising Rents Push Up Future Inflation? – San Francisco Fed
• Where in the US are homes most affordable? – Quartz

On China

• Chinese developers selling off more London property to raise cash. Shanghai-based Greenland is latest to exit with £40mn sale of Ram Brewery site – FT

On other countries:  

• [Australia] Australian families are giving up on the suburban dream – but are new apartments up to the job? More and more Australians are likely to live in flats as the price of houses soars beyond their means. But design standards have allowed too many substandard blocks to go up – The Guardian
• [Australia] Major banks predict 14% drop in house prices. They’re wrong – Yahoo Finance
• [Australia] Land and Housing Supply Indicators. A summary of research undertaken by the ABS investigating indicators to measure the relationship between land-use regulation and housing supply – Australian Bureau of Statistics
• [Hong Kong] Hong Kong Home Sellers Cut Asking Prices as Covid Curbs Tighten – Bloomberg
• [New Zealand] New Zealand’s housing crisis is worsening. That is bad news for a government which promised miracles – The Economist
• [New Zealand] House prices continue to increase, slowdown expected – RNZ
• [New Zealand] New Zealand homes sales and prices ease in January – Reuters
• [New Zealand] Tighter lending among factors slowing house price growth – REINZ – RNZ
• [Netherlands] Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices – Central Bank of Netherlands
• [South Korea] As house prices soar, ordinary South Koreans learn to love stocks. Asia’s fourth-largest economy is overcoming a historical aversion to financial assets and embracing the stock market. – Al Jazeera
• [United Kingdom] House Prices 30 Years Ago Determine Who Gets U.K. Energy Rebates. Britons are relying on arcane system to get 150 pounds of aid. Millions who don’t need help will be eligible for the relief – Bloomberg
• [United Kingdom] UK needs 230,000 new rental homes to meet growing demand. With more people renting for longer, UK will face a shortfall in private rented property, analysis shows – The Guardian

From the IMF’s latest report on North Macedonia:

“The authorities emphasized that the health and stability of the banking system has been preserved through the pandemic, and they continue to closely monitor risks. Regulatory flexibility, temporary restrictions on dividend payments, and economic policy support helped maintain credit to the economy during the pandemic. The NBRNM has strengthened the reporting frequency and data requirements for monitoring credit quality, introduced a comprehensive and consistent bottom-up stress testing, and increased the focus on risks such as cyber risks, which are being taken into account when setting bank-specific Pillar-II capital requirements. Given high growth in new mortgages and rising house prices, a targeted assessment is underway. Moreover, the NBRNM is closely monitoring deposit-driven euroization, which increased during the pandemic, against the plan set out in the denarization strategy.

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Banking system strength has held up well during the pandemic, but continued vigilance is essential. The banking system overall remains well capitalized and profitable. Initiatives to improve the framework for stress tests of banks are welcome, together with intensified supervisory efforts to ensure that banks recognize any problem assets and provision adequately for potential loan losses on a forward-looking basis. Given the still high share of FX or FX-linked loans in household loans, with possibly limited hedging of borrowers, the NBRNM should maintain carefully calibrated measures to limit FX lending. Moreover, rising private sector debt, albeit from low levels, and the high growth in mortgage lending, coupled with an acceleration in house prices, warrant further scrutiny.”

From the IMF’s latest report on Spain:

“Continued efforts to address housing affordability challenges would support growth, facilitate labor mobility across regions and reduce inequality. Prior to the pandemic, limited rental housing supply hampered by relatively inefficient building regulations contributed to a surge in rental prices, creating affordability problems and limiting labor mobility (especially for young people and other vulnerable groups). The draft housing law and the national housing plan aim to address the existing challenges. To limit increases in rent prices in stressed areas, the law introduces rent caps on large landlords and tax incentives for small landlords to keep rents low. While these may benefit tenants in the short term, rent caps could introduce inefficiencies and restrict the availability of properties for future tenants. Further evaluation of these measures would be useful to gauge their impact. The envisaged targeted rent support programs for vulnerable groups are welcome. However, they should be combined with effective supply measures to avoid further pressures on rent prices. The increase of taxes on empty properties and the expansion of the social housing stock, which are contemplated in the proposed reform, should help increase rent supply. The RTRP envisages €1 billion for the construction of new public social rental dwellings in 2022–23. Additional policies to increase housing supply could include simplifying land use regulations and accelerating licensing processes at the regional government level.”

From European Systemic Risk Board:

“In this report, the ESRB presents its medium-term assessment of vulnerabilities relating to the RRE sector across the EEA countries. In carrying out this assessment, the ESRB first performed an analysis of vulnerabilities across the EEA countries. For the 24 countries for which the vulnerabilities identified were more pronounced, an in-depth analysis was conducted. This analysis pointed also to the need to take into account or change other than macroprudential policies, for example by changing tax incentives or increasing the housing supply. A similar assessment was conducted by the ESRB in 2019, when 11 countries received either ESRB recommendations (Belgium, Denmark, Finland, Luxembourg, Netherlands and Sweden) or warnings (Czech Republic, Germany, France, Iceland and Norway).

The risk assessment concluded that, in five countries which received ESRB recommendations or warnings in 2019 (Denmark, Luxembourg, Netherlands, Norway and Sweden) the vulnerabilities relating to residential real estate markets remained high, while in six countries (Belgium, Czech Republic, Germany, Finland, France and Iceland) the vulnerabilities were assessed as medium. Among other EEA countries, 13 (Austria, Bulgaria, Estonia, Croatia, Hungary, Ireland, Liechtenstein, Lithuania, Malta, Poland, Portugal, Slovenia and Slovakia) were identified as facing medium risks.

The policy assessment found that in five countries which received ESRB recommendations or warnings in 2019 (Belgium, Czech Republic, France, Iceland and Norway), policies were assessed as appropriate and sufficient to mitigate the vulnerabilities identified. In two countries (the Netherlands and Sweden), policies were assessed as being appropriate but partially sufficient, while in four of the countries (Germany, Denmark, Finland and Luxembourg), policies were assessed as partially appropriate and partially sufficient. Among the rest of the EEA countries analysed in this report, in one country (Slovakia) policies were identified as appropriate and partially sufficient, while in five countries (Austria, Bulgaria, Hungary, Croatia and Liechtenstein) policies were found to be partially appropriate and partially sufficient.

In countries in which the policies were assessed as only partially sufficient to mitigate the identified vulnerabilities, the ESRB suggested various macroprudential measures to be considered by the national authorities. In particular, the ESRB pointed out that a number of countries should either introduce additional borrower-based measures or tighten existing ones to mitigate the existing vulnerabilities more effectively or prevent a further build-up of vulnerabilities. Countries with accumulated vulnerabilities should also ensure that capital is preserved until a possible materialisation of risks or consider (re)introducing capital-based measures once the economic recovery is on a firm footing. However, taking into account the economic uncertainty related to the pandemic, any policy actions should be carefully assessed to ensure that they contribute towards mitigating RRE vulnerabilities, while aiming to avoid procyclical effects on the real economy and the financial system. In the near term, it is particularly important for all countries that banks make adequate provision for expected losses. Finally, the analysis notes that, in some countries in which the systemic risk levels identified remain high, interventions in other policy areas may be required to complement macroprudential policy.”