The Unassuming Economist

From the IMF’s latest report on Hong Kong:

“Residential house prices are on the rise again, contributing to a further increase in the already elevated level of household debt. The average debt-servicing ratio for new mortgages increased to 36.9 percent at its peak in February 2021 from 36.0 percent in December 2019, partly driven by the decline in household income. While household assets are large in aggregate—as reflected by the high household net worth-to-liabilities ratio of 11.2 times and safe assets-to-liabilities ratio of 2.9 times in 2019—the wealth distribution is skewed towards high-income households.

Given the stretched valuation, a disorderly adjustment in the property market could pose a risk to the economy. A sharp house price correction could trigger an adverse feedback loop between house prices, debt service capacity, household consumption, and growth, negatively affecting banks’ balance sheets. In addition, the FSAP analysis indicated that low-income households could be under significant financial stress when facing rising interest rates and falling income. To mitigate such risks, the authorities should continue to carefully monitor the household debt repayment capacity, particularly for low-income households.

The three-pronged approach to increasing housing affordability and containing housing market risks remains valid, but more efforts are needed to raise housing supply.

*Increasing housing supply is critical to resolve the structural supply-demand imbalance. Housing supply has increased on average since 2015 with the implementation of the government’s Long-term Housing Strategy and the Hong Kong 2030+ Strategy, but has fallen short of target by about 30 percent on average. Staff welcomes the identification of the land to provide 330,000 public housing units within the next ten years and urges the authorities to bring the actual public housing production back to the target without further delays. To this end, a comprehensive approach is urgently needed, including increasing land supply for housing production (e.g., land resumption, reclamation, and re-zoning) while expediting and streamlining the process for land identification and production (e.g., environmental, transport, and other relevant assessments). The recently announced Northern Metropolis development strategy could boost housing supply over the longer-term period.

**The macroprudential stance for property markets should be maintained to safeguard financial stability. A series of macroprudential policies that have been introduced and tightened since 2009—such as ceilings on loan-to-value (LTV) ratio, caps on debt service-to-income ratio (DSR), and stress testing of the DSR against interest rate increases—have helped contain vulnerabilities in the banking system (…). Given resilient house prices and mortgage growth, the existing residential property-related macroprudential policies should be kept unchanged for now and any changes should be data-dependent with due attention to the emerging risk of regulatory leakages. Moreover, the Council of Financial Regulators (CFR) should take the lead in strengthening the regular surveillance and data collection on lending by non-bank lenders (e.g., property developers and non-bank financial institutions), and the authorities should regularly reassess the need to expand the regulatory perimeter to mitigate the leakages in macroprudential policies.

***Stamp duties have been effective in containing speculative activity and external demand. The government has introduced three types of stamp duties to curb excess demand by both residents and nonresidents. Although they have helped curb house price increases and contain household leverage and systemic risks, the New Residential Stamp Duty (NRSD) introduced since November 2016 (…) is a residency-based capital flow management measure and a macroprudential measure (CFM/MPM) levied at a higher rate on non-residents than on first-time resident home buyers. Therefore, staff recommends phasing it out once systemic risks from the non-resident inflow dissipate.

Authorities’ Views

The authorities agreed that increasing land supply remains the key to fundamentally resolving the structural imbalance between housing demand and supply. They emphasized that various measures had been taken to boost land supply for housing production, including by accelerating land resumption and expediting and streamlining the process of land production, and such efforts were starting to bear fruits. The authorities viewed the current tight macroprudential stance for housing market as appropriate given the elevated house prices, while noting that they will continue to closely monitor the housing market and stand ready to make necessary adjustments with a view to safeguarding financial stability. They noted that mortgage lending by non-banks has been closely monitored and has declined in recent years amid the authorities’ efforts to regulate banks’ lending to non-banks and the expansion in the mortgage insurance program.”

Source: Centre for Global Development

For the many urbanized and rapidly urbanizing countries, the East Asian experience with and response to emerging challenges is a model to look up to. As high-income East Asian economies approach peaking urbanization, they are now plagued with several challenges. From service sector and export-led growth outstripping manufacturing to rising carbon levels in cities, aging populations, and infrastructure that struggles to catch up with advances in technology- the concerns are aplenty.

In this working paper for the think tank, CGDEV, author Shahid Yusuf writes about how EA countries can respond to these challenges with the use of strategic long-range planning, technological advances, broader implementation capacity, and better resource mobilization. With that, he draws larger inferences that can guide policymakers in tackling the challenges of urbanization elsewhere.

From a NBER paper by Pierre Bachas, Matthew H. Fisher-Post, Anders Jensen and Gabriel Zucman:

“How has globalization affected the relative taxation of labor and capital, and why? To address this question we build and analyze a new database of effective macroeconomic tax rates covering 150 countries since 1965, constructed by combining national accounts data with government revenue statistics. We obtain four main findings: (1) The effective tax rates on labor and capital converged globally since the 1960s, due to a 10 percentage-point increase in labor taxation and a 5 percentage-point decline in capital taxation. (2) The decline in capital taxation is concentrated in high-income countries. By contrast, capital taxation increased in developing countries since the 1990s, albeit from a low base. (3) Consistently across a variety of research designs, we find that the rise in capital taxation in developing countries can be explained by a tax-capacity effect of international trade: Trade openness leads to a concentration of economic activity in formal corporate structures, where capital taxes are easier to impose. (4) At the same time, international economic integration reduces statutory tax rates, due to increased tax competition. In high-income countries, this negative tax competition effect of trade has dominated, while in developing countries the positive tax-capacity effect of international trade appears to have prevailed.”

Source: Project Syndicate

In a recent column, John H. Cochrane of the Hoover Institution and Jon Hartley of Foundation for Research on Equal Opportunity write about the US’ long-ignored issue of supply-chain bottlenecks contributing to raging inflation today.

“The return of inflation is an economic cold shower”

They write how sclerotic growth in the country is not so much due to the “secular stagnation” of demand-side factors, but more due to clogging of the economy’s productive capacity. “The United States needs infrastructure. The problem is not money. The problem is that building anything in America has become almost impossible, owing to the thicket of regulations and lawsuits that will stop or drive up the costs of any project.” Barriers such as rocketing housing costs, deteriorating quality of public education, restrictive labor laws, trade protectionism, and other things all add to the problem. The authors also discuss some solutions to systematically eliminate such challenges.

From Austrian National Bank:

“The steep upward trend in residential property prices has continued – this was recently confirmed by the Oesterreichische Nationalbank (OeNB) in its Property Market Review Q1/22, which analyzes housing market trends, both in Austria and in Central, Eastern and Southeastern Europe (CESEE). In the fourth quarter of 2021, residential property prices in Austria recorded a year-on-year increase above 10% for the fifth time in a row. House prices in CESEE continued to grow steeply as well, with housing market dynamics raising concerns about financial stability risks in several CESEE countries.

Austria: clear uptrend in house prices continued for the fifth quarter in a row – both in and outside Vienna

In year-on-year terms, price growth remained above 10% in the fourth quarter of 2021 − both in Vienna and in the rest of Austria. In Vienna, prices increased by 11.3%, and prices in the other provinces rose by 13.9%. This means that, for Austria as a whole, house price growth reached a new peak at 12.6% (see table 1).

House prices in Austria increasingly misaligned with fundamentals

With a reading of 29.8% in the fourth quarter of 2021 − 7.6 percentage points higher than in the previous quarter − the OeNB’s fundamentals indicator for residential property prices in Austria showed the sharpest increase since the start of the series in 1989. The indicator for Vienna even came to 35.6%, showing an increase of 5.1 percentage points against the third quarter.

House prices in Central, Eastern and Southeastern Europe grew steeply with growth rates above EU average

In CESEE, house prices rose steeply in the second and third quarter of 2021, with growth remaining above the EU average. House price growth in CESEE was driven by several factors: On the demand side, the overall recovery can be seen as one of the key reasons explaining the house price dynamics observed in the second and third quarter of 2021. Moreover, partly generous government measures to support the purchase of residential property in several CESEE countries pushed up demand for housing. In terms of financing conditions, housing loan growth was supported by low interest rates. Rising construction costs and an overall shortage of input material have constrained the supply of new housing, eventually translating into additional pressure on house prices. Overall, housing market dynamics are raising concerns about financial stability risks in several CESEE countries.”