The Unassuming Economist

From a new IMF research paper by Giovanni Dell’Ariccia, Ehsan Ebrahimy, Deniz O Igan, and Damien Puy:

“In Spain, private sector credit as a share of GDP almost doubled between 2000 and 2007. This increase was accompanied by a boom in housing prices—which doubled in real terms over the same period. The economy as a whole also grew at a record pace.

But then in 2008, Spain’s credit bubble burst, and with it came loan defaults, bank failures, and a prolonged economic slowdown.

A less-noticed development in Spain was in the construction sector, where employment grew by an astounding 47 percent, compared to the economy-wide increase of 27 percent.

New IMF staff research, based on a large sample of advanced and emerging market economies since the 1970s, shows that long-lasting credit booms that featured rapid construction growth never ended well.

New evidence on credit booms

Rapid credit growth—known as “credit booms”—presents a trade-off between immediate, buoyant economic performance and the danger of a future crisis. The risk of a “bad boom”—where a rapid credit growth episode is followed by a financial crisis or subpar economic growth—increases when there is also a boom in house prices.

Our research shows that the experience with the dangerous combination of credit booms and rapid expansion in the construction sector goes beyond the Spanish borders and extends to time periods not related to the global financial crisis.

We find that signals from construction activity may help to tell apart the dangerous booms, which need to be controlled, from the episodes of buoyant but healthy credit growth (“good booms”).

Credit booms do not lift all boats alike

During booms, output and employment expand faster. But not all sectors behave the same. Most of the extra growth is concentrated in a few industries—specifically, construction and, at a distant second, finance.

However, the same industries that benefit the most during booms experience the most severe downturns during busts. This implies that credit booms tend to leave few long-term footprints on a country’s industrial composition.”

 

Continue reading here.

From a paper by William Miles (Wichita State University):

“Although the Scottish electorate voted down independence in 2014, Brexit has led to renewed calls from Scottish political leaders for a second referendum. Scottish independence would likely lead to joining the European Union, and this would obligate Scotland to eventually join the euro common currency. If Scottish home prices were not highly cohesive with those in euro zone countries, the ECB’s monetary policy could cause major disruptions for Scottish housing, and, by extension, the Scottish economy. As an example, if most euro-country home values were rising, but those in Scotland were falling, the ECB would likely run a tight monetary policy, which would be devastating to housing conditions in Scotland. We accordingly investigate the co-movement of house prices in Scotland with those in eight major euro zone countries, as well as co-movement between Scottish and UK home prices, using a variety of metrics. The use of methods that are primarily linear indicates that joining the euro may not result in a large loss of co-movement with other regional housing markets, compared to Scotland’s current correlation with UK national home prices. However, the use of a measure that takes into account differences in the magnitude, and not just the phase of cycles yields results indicating Scotland exhibits very little co-movement with other euro housing markets. Indeed Scotland has co-movement metrics within the euro countries at levels similar to those of Spain and Ireland, which both suffered devastating booms and busts. Thus leaving sterling for the euro could be highly problematic.”

From Social Europe post by Monique Goyens:

“In the latest contribution to our series on ‘just transition’, Monique Goyens argues that it must address the people finding it hard to pay their energy bills.

The task of moving to a carbon-neutral society is herculean, but the benefits won’t just include saving the planet. There are also long-term economic gains, even for the most hard-up.

An estimated 50 million around the European Union struggle to keep their homes warm and pay their energy bills. Many suffer from the same problems: poorly insulated homes, ill-suited tariffs, insufficient advice on how to save energy or a combination of all three.

The lowest income earners in the EU spend an increasingly large share of their budget on energy—rising from 6 per cent in 2000 to 9 per cent in 2014. In the short term, for this group, it makes more sense to use energy more efficiently than to invest in solar panels, heat pumps or pellet stoves. It will also deliver faster savings.

The choice should not however be between having a warm home and having food on the table. In making their homes more efficient, people consume less energy to heat their living space and can more easily pay their bills.

But getting people to take action can be complex. Those at risk of energy poverty might feel overwhelmed and prioritise solving other problems, such as warmer clothing or food. Often, they might not know what solutions are out there.

For governments and energy advisers to upload advice about insulation to a website isn’t enough. That advice needs to get out to people. Human contact also helps.”

Continue reading here.

From the IMF’s latest report on Japan:

“Japan’s population is rapidly aging and shrinking, and doing so unevenly across regions. Large cities, notably the Greater Tokyo area, are experiencing net migration inflows, while other regions are experiencing net migration outflows. In this chapter, we assess the regional differences in population dynamics and their implications for house price developments in Japan. Due to the durability of housing compared to other forms of investment, the magnitude of house price declines associated with population losses is larger than that of house price increases associated with population gains. These model-based predictions are likely to underestimate the actual fall in house prices associated with future population losses, as expectations of lower housing prices in the future could trigger more population outflows and disposal of houses, especially in rural areas. We suggest policy measures to help close regional disparities and avoid potential over-investment by taking account of demographic trends for housing supply.”

From the IMF’s latest report on the Philippines:

“The near-boom credit episodes detected between 2014 and early 2018 coincided with strong lending growth in the real estate sector. The latter contributed importantly to the strong overall lending growth of close to 20 percent during this period. Notwithstanding some moderation recently, credit to real estate has continued to outpace that in manufacturing and other sectors. It now accounts for the largest share in total loans outstanding (18 percent).

Strong property demand from a few key players drove the real estate credit growth. The recent rise of Chinese online gaming companies operating in the Philippines (Philippines Offshore Gaming Operators—POGO) has led to a large inflow of Chinese workers and increased demand for residential and office properties. The dynamic business process outsourcing (BPO) industry has been another important driver of property demand, while demand for residential housing has also remained strong. Property prices have risen in this environment, translating into higher credit needs for many buyers.

The quality of real estate loans remains sound, despite a recent uptick in NPLs. As of end-2018:Q2, NPL ratios for real estate loans were at record low levels after a steady decline. The relatively stable NPL ratio for residential loans has not followed the continuous decrease in the NPL ratio of commercial real estate loans. This could partly reflect the fact that the 20 percent limit on the share of total bank loans to commercial real estate is binding, which could be keeping bank lending focused on high-quality projects.

Continued strong real house price increases amid the cooling in residential real estate lending suggests a need for close monitoring of related market risks. House price increases in 2018 were broadly similar to those in 2017 despite the slowdown in real estate credit growth. The latter could have partly reflected the tighter lending requirements to the real estate sector in effect since mid-2018.3 Meanwhile, the increase in real house prices could be associated with high real estate demand from POGO companies and workers, which typically does not involve credit from the domestic banking system, or, possibly, increased shadow-banking activities by real estate developers, with increased indirect exposure by domestic banks.

BSP has introduced several macroprudential measures to identify and prevent the buildup of financial stability risks. These include Basel III Liquidity and Net Stable Funding Ratios, and a countercyclical capital buffer (CCyB), which has not yet been activated, as well as the Real Estate Stress Test (REST), real estate sectoral exposure limits, and mortgage collateral value limits. The Philippines’ Macroprudential Policy Measures (Box 2) discusses in greater detail the prudential measures introduced by the BSP since 2007, including newly-introduced measures on the real estate sector credit.”