The Unassuming Economist

Global property’s goody-two-shoes are in trouble

“A housing crash sent the global economy into recession between 2007 and 2009. But three countries—Australia, Canada and Sweden—cruised through the commotion. Even as property prices plummeted elsewhere, all three recorded double-digit growth.” read more here.

The latest release of the S&P CoreLogic Case-Shiller Indices showed that cities in Florida reported the highest annual house price gains among the 20 cities covered by the indices. Miami led the way with a 18 ½ % increase, closely followed by Tampa with a 17% percent increase.

A new NBER Working Paper “Florida (Un)Chained” by Charles W. Calomiris and Matthew S. Jaremski, available here, looks at Florida’s land boom and crisis of mid–1920s, which can be helpful in drawing parallels to the present. Below we present the figure 2 from their paper that depicts East Cost Railroad and Monthly Building permits by city.

The authors reach the following conclusions –

·         Florida’s unique land markets and banking system explains why developers and not just depositors suffered great losses.

·         The crisis can be explained using bounded rationality as people behaved reasonably given the information available to them. Individual agents did not invest in obtaining further information that may have led to different decisions and behavior.

·         National advertisements for Florida land led to many of these properties being purchased from a distance. Buyers did not have information regarding the extent of supply – or the quality of land. Given the lack of information on aggregate activity, supply began to exceed the potential demand. Advertisements often mentioned recent price rises to entice buyers with prospects of future returns.

·         From a banking perspective, regulators and bank examiners did not prevent hidden risks from insider lending to be built into the system. These hidden risks ended up toppling many of these banks. Some banks indulged in fraudulent activities by hiding high levels of loan risks. Figure 7 from their paper provides the ratio of real estate loans to total loans in state bank by county.

·         Will there be a crisis again and will it be different? The authors say that all crises are not alike, and they must be studied as distinct historical phenomena.

On cross-country:

• OECD Analytical House Price database: December update – OECD

On the US—developments on house prices, rent, permits and mortgage:    

• Case-Shiller: National House Price Index “Continued to Decline” to 10.6% year-over-year increase in September. FHFA: Third quarter “House prices were up 0.1 percent compared to the second quarter of 2022.” – Calculated Risk
• Home Prices Continue to Decline in September – NAHB  
• U.S. house annual prices slow again in September – Reuters
• Inflation Adjusted House Prices 3.3% Below Peak. House Price-to-Rent Ratio Declines to 4.7% Below Peak – Calculated Risk  
• U.S. Government to Backstop Mortgages Above $1 Million in High-Cost Areas. Highest limit applies to most expensive regions; level also set to rise in rest of the country, reflecting increased home prices – Wall Street Journal
• U.S. to Back $1 Million Mortgages. Affordability Is Still an Issue. – Barron’s
• Home Buyers Could Soon Get $1 Million Mortgage With 3% Down Payment. Higher limits for federally backed mortgages will give buyers more flexibility in their house hunts – Wall Street Journal
• Rents Falling Faster than “Seasonality Alone”. Expect YoY Rents to Slow Further in Coming Months – Calculated Risk

On the US—other developments:    

• As Mortgage Rates Rise, More People Choose to Rent Single-Family Homes. In response, major builders and developers are getting into the business, which was once dominated by mom-and-pop outfits – Wall Street Journal
• The Short- and Long- Run Effects of Remote Work on U.S. Housing Markets – University of California
• Rising Inventory Will Be the Housing Market’s Next Problem – Bloomberg
• US Housing Enters Deep Freeze With Sellers and Buyers Sidelined. Agents struggle to find listings as deals decline, mortgage rates remain high and signs point to leaner times ahead. – Bloomberg 
• FHFA Announces Baseline Conforming Loan Limit Will Increase to $726,200. High-Cost Areas increase to $1,089,300 – Calculated Risk
• Activist House Flippers Take On Wall Street to Keep Homes From Investors. Housing groups try to counter rental conversions and help lower-income residents achieve homeownership – Wall Street Journal
• Abundant Policy Options Available to Improve Housing Affordability for Families – Cato
• In Tough Housing Market, Renters Renovate Like They Own the Place. Priced out of the home market, many renters are splurging on new fixtures, wallpaper and other upgrades – Wall Street Journal
• The Fed and Measures of House Prices – American Action Forum  

On China:

• China Is Finally Trying to Fix Its Housing Crisis. After a year on the sidelines, Beijing this week took steps to get hundreds of billions of dollars into the hands of the country’s flailing real estate developers. – New York Times
• China property bailouts leave most out in the cold – Reuters

On other countries:  

• [Australia] Australia house prices forecast to slump 16% from peak – Reuters
• [Australia] Why mortgage stress is on the rise – Financial Review
• [Greece] Greek residential property price recovery picks up in third quarter – Reuters
• [Hong Kong] Hong Kong Oct home prices drop 2.4%, biggest fall in 4 years – Reuters
• [Hong Kong] Hong Kong Property Slump Reaches City’s Coveted Luxury Homes. Luxury sales at lowest in 9 years with prices to fall further. Even clients with cash on hand adopt wait-and-see mindset – Bloomberg 
• [India] Home loans remain healthy for India’s banks, NBFCs amid rising rates – S&P Global
• [New Zealand] New Zealand House Prices Suffer Biggest Annual Drop in 13 Years – Bloomberg
• [South Korea] Korean House Prices Drop by Most Since 2013 as Credit Woes Mount. Policy makers seek to prevent hard landing in property market. Market correction likely to deepen as pessimism rises: survey – Bloomberg
• [Sweden] Riksbank Sees Deeper Home Price Fall in Sweden as Rates Rise. Nordic country’s housing prices now seen falling by a fifth. Sweden is among the bellwethers of the global property slump – Bloomberg
• [United Kingdom] High mortgage rates push UK first-time buyers towards rental market – Rightmove – Reuters
• [United Kingdom] UK housing market seen facing further ‘mini-budget’ fallout – Reuters
• [United Kingdom] UK homeowners forced to settle for below asking price, Zoopla says. Property website data shows housing market is slowing, with 44% less demand for homes and sellers accepting 3% below asking price – The Guardian
• [United Kingdom] UK mortgage approvals drop more than expected as borrowing costs rise. Repayment rates increase as buyers contend with soaring inflation and higher interest rates – FT
• [United Kingdom] Student housing is the bubble that won’t burst. Budget squeezes are no match for a sector with a structural supply shortfall – FT
• [United Kingdom] UK house prices fall at fastest pace since June 2020. Drop of 1.4% in November comes as rising borrowing costs weigh on sentiment, says Nationwide – FT 

From the IMF’s latest report on Lithuania:

“To address potential risks to the financial sector from rising residential real estate prices, the BoL has implemented a series of macroprudential measures. These include tighter down payment requirements for second and subsequent housing loans and a new sectoral systemic risk buffer for banks with the largest mortgage portfolios. The distribution of loan-to-value ratios on new loans has shifted down since the measure was implemented. The BoL estimates that these measures could reduce new mortgages by 10 percent and slow house price growth by as much as 3 percent. However, the effectiveness of capital-based measures might be limited given excess capital and the profitability of the banking system. Addressing some of the underlying structural bottlenecks in housing supply will help contain real estate prices that, over the last year, appear to have deviated from fundaments in the Vilnius area. This would require a comprehensive approach to regional development and changes in land-use policies to increase allocation to residential housing.

Given higher uncertainty, the emphasis should remain on mitigating potential financial stability risks. While the banking sector remains among the most concentrated in the EU, the degree of concentration across loan segments—and most notably consumer loans—has declined after the third largest bank completed its restructuring. At the same time, interest rates on loans have declined without affecting credit standards. Low interest rates and strong household income are factors driving the boom in the residential real estate market. However, rapidly rising house prices, record sales, buyer intent indicators, and an increase in secondary mortgages may be signs of overheating. Nearly half of real estate transactions do not involve a mortgage, suggesting that an increase in interest rates may have a limited effect on house prices. The expected rapid growth of an online fintech bank focused on non-resident activity and ambitious expansion plans across the EU will require sustained supervisory efforts by national and supranational authorities.”

On cross-country:

• Reuters Q1 polls on major world housing markets – Reuters
• Around the World, Buying Is Costlier Than Renting. A new study compares the costs of renting versus buying a three-bedroom home in 39 countries across the globe. – New York Times
• To build or not to build, that is the uncertainty: Fuzzy synthetic evaluation of risks for sustainable housing in developing economies – Cities

On the US:    

• The Coming Rise in Residential Inflation – NBER
• The Fed’s Housing Dilemma: There Is No Way to Be Neutral – Barron’s
• How Bad Will It Be? Why the Spring Housing Market Will Be ‘Miserable’ for Homebuyers – Realtor
• US Housing Supply Gap Expands in 2021 – Realtor
• To Fix Its Housing Crisis, California Must Unleash the Duplex. State officials should look to New Jersey to see how zoning roles that allow “light touch density” can bring down housing costs — if local leaders allow it. – Bloomberg
• Audit: L.A. Spending as Much as $837,000 per Unit of Housing for Homeless. Despite apportioning over $1 billion for homeless housing, cost overruns and sluggish pacing threaten to jeopardize the city project. – Reason
• Pandemic Mortgage Relief Headed Off Delinquencies, but What Happens Now? – Dallas Fed
• Investors brace for flood of mortgage bonds when Fed trims balance sheet. US central bank is set to unwind massive pandemic-era stimulus measures – FT
• Short-Term Property Rental Platforms and the Housing Market: House Prices and Liquidity – Journal of Housing Research
• U.S. house prices to rise another 10% this year – Reuters

On China

• China urges banks, insurers to support affordable rental housing – Reuters
• A small measure of help for homebuyers. Relaxing mortgage requirements might help some to purchase flats that are larger than a car parking space – South China Morning Post
• Chinese Developers’ Dollar Bond Woes Deepen: Evergrande Update – Bloomberg
• Chinese Property Developers’ Broken Promises Erode Investor Confidence. China’s property-bond market remains deeply distressed as real-estate sales fall and investors retreat on a lack of trust – Wall Street Journal

On other countries:  

• [Germany] German house price rally to slow but cheap money to keep it running – Reuters
• [Ireland] Referendum on housing could be held next year. The Housing Commission has established a referendum subcommittee – The Irish Times
• [United Kingdom] Consumption Effects of Mortgage Payment Holidays: Evidence during the COVID-19 Pandemic – IMF
• [United Kingdom] Rightmove predicts property transactions return to ‘pre-pandemic levels’ this year. Bullish earnings report shows 2021 was busiest in FTSE 100 group’s 21-year history – FT
• [United Kingdom] Builders face an end to era of through-the-roof house prices. Their winning streak is fading before the cost of living crisis, supply and staff woes, and now conflict in Europe – The Guardian
• [United Kingdom] UK house prices surge in February despite rising mortgage rates. Nationwide house price index climbs 12.6%, pushing average cost of home over £260,000 – FT