The Unassuming Economist

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.”

From the IMF’s latest report on Singapore:

“Driven by strong demand, the private residential housing market runs the risk of diverging further from fundamentals, while commercial real estate is recovering following a few slow years due to the pandemic. House price inflation exceeding pre-COVID trends reflects strong dwelling demand driven by a shift to working from home, changes in domestic household formation with more single home households, increase in foreign demand, low real lending rates and constrained supply exacerbated by the pandemic. Some moderation in price growth occurred during the first quarter of 2022 (…). At close to 90 percent, Singapore already has one of the highest home ownership rates, implying that housing demand is principally being driven by non-residents and resident search for yield activity. Staff analysis suggests that private residential house prices are currently above long-term fundamentals. 13,14 Following a sharp decline in prices in 2020, commercial real estate showed signs of recovery in 2021, with prime office rents rising. However, prices in this segment remain below their pre-pandemic levels.

The authorities recently tightened macroprudential measures to cool buoyancy in private and public residential real estate markets, complemented by supply-side measures. Systemic risk is elevated but centered mostly in private residential real estate markets, with key macro-financial transmission channels operating through: (i) an elevated level of household debt, which peaked at 71 percent of GDP during the pandemic, about three quarters of which is secured against real estate; (ii) a high share of mortgages with fixed rates for 3 years or less before transitioning to floating rates; (iii) strong foreign demand sustaining private residential valuations; and (iv) property market related loans representing a third of banks’ total loans by end-2021. Stable average LTV and DS ratios, normally based on conservative interest rate assumptions, are mitigating factors. Recent measures to moderate residential property prices included (i) raising the Additional Buyer’s Stamp Duty (ABSD) rates (text table), (ii) tightening the total debt servicing ratio (TDSR) from 60 to 55 percent, and (iii) tightening the loan to value (LTV) limit for loans from HDB from 90 to 85 percent to encourage greater financial prudence. Based on MAS’ estimates, the resident credit-to-GDP gap was 10.6 percent in Q1 2021 but has since moderated to 0 percent. The authorities have also issued advisories urging prudence in new loan origination, particularly for property purchases. These and other measures complement plans to raise the supply of public and private housing with the Housing and Development Board targeting to raise public flat supply by 35 percent in 2022 and 2023.”

On cross-country:

• World’s Frothiest Housing Market Cools in Global Warning Signal. New Zealand’s home sales and prices are tumbling, providing a glimpse of what may unfold elsewhere. – Bloomberg
• Higher interest rates to test buoyant housing markets. Markets where property prices surged during the pandemic are now among the most exposed to a crash – FT
• Housing Boom Fades World-Wide as Interest Rates Climb. Prices are falling in some places, raising the risk of market routs and adding to central banks’ challenges – Wall Street Journal
• Economy Week Ahead: Housing Market and Central Bank Policy in Focus. Expected economic news includes decisions by the European Central Bank and the Bank of Japan – Wall Street Journal
• How to overcome challenges the housing world is facing now – Washington Post

On the US:    

• Housing Starts in US Decline to Lowest Level Since September. Groundbreaking dropped 2% to 1.56 million pace in June. Single-family construction, permits fell to two-year lows – Bloomberg
• U.S. Home Sales Fell Again in June, Economists Estimate. The housing market and construction have cooled as higher interest rates start to bite – Wall Street Journal
• Home Building Slipped in June for Second Straight Month. Housing starts fall 2% as buyer demand softens under weight of higher interest rates – Wall Street Journal
• The Housing Market Is Correcting—So Why Are Home Prices Still Soaring? – Realtor
• Housing’s Contribution to Economic Development – Reframing the Narrative – USC Lusk Center for Real Estate With – The Way Forward Housing Coalition
• Housing Demand and Remote Work – San Francisco Fed
• Foreign Buyers Return to US Housing Market After Three-Year Drought. After three straight years of declining sales, buyers from other countries purchased $59 billion worth of US homes – Bloomberg
• Single-Family Starts Fall to Two-Year Low on Higher Construction Costs and Interest Rates – NAHB 
• Slowdown in Single-Family Permits in May 2022 – NAHB
• Dynastic Home Equity – San Francisco Fed
• Federal Housing Policies Make It Easier to Get a Loan but Not Be a Homeowner – Cato Institute
• Remodeling Gains to Slide Lower Through Mid-Year 2023 – Harvard Joint Center for Housing Studies
• Dreams adrift: pandemic relocations deepen Hawaii’s housing crisis. As key workers abandon hopes of home ownership and desert the archipelago, its economy and laid-back lifestyle are under threat – FT
• The Housing Shortage Isn’t Just a Coastal Crisis Anymore. An increasingly national problem has consequences for the quality of American family life, the economy and the future of housing politics. – New York Times
• Home Prices Grew at Near-Record High in Second Quarter. FNM-HPI Measured Home Price Growth at Annualized Rate of 19.4 Percent in Q2 2022 – Fannie Mae 

On China

• Chinese city Zhengzhou sets up bailout fund as mortgage boycott spreads. The homebuyer revolt over stalled projects is aggravating a property sector crisis – FT
• People Are Refusing to Pay Their Mortgages in China. The Protest Could Spill Into the Wider Economy – Time 
• China’s Mortgage Boycott Capital Plans Property Bailout Fund. Henan’s capital Zhengzhou faces the most mortgage protests. The bailout fund will help stressed projects in Zhengzhou – Bloomberg
• China’s mortgage boycott spurs shakeout among strapped developers – Reuters 
• China property: refusing to pay mortgages is a powerful political weapon. Unrest could mark a bad start to president Xi Jinping’s third term – FT
• China banks told to bail out property developers as mortgage boycotts threaten economy. Intervention comes as thousands of homebuyers refuse to make mortgage repayments in deepening property sector crisis – The Guardian
• China Seeks to Quell Mortgage Revolt Among Frustrated Home Buyers. Analysts estimate home buyers could walk away from as much as $150 billion to $370 billion in home loans – Wall Street Journal
• China Weighs Mortgage Grace Period to Appease Angry Homebuyers. Officials consider temporary waivers after payment boycott. Property crisis has fueled concerns about social stability – Bloomberg
• China urges banks to extend loans for real estate projects amid mortgage boycott – Reuters
• Chinese regulators rush to tame investor panic over mortgage boycotts. Homebuyers stop paying loans on more than 200 unfinished property projects – FT
• More Chinese Homebuyers Refuse to Pay Mortgage Loans Amid Contagion Fears. Bank stocks fell on concern property crisis is spreading. Projects facing mortgage snubs more than tripled since Monday – Bloomberg
• China Convenes Banks on Mortgage Boycott Roiling Markets. Officials asked for information on impact of housing loan snub. More buyers refuse to pay loans on unfinished home projects – Bloomberg 
• Homebuyers in Multiple Cities Go on Mortgage Strike Over Delayed Projects – Caixin Global
• Is China stumbling into its own mortgage crisis? – Washington Post 
• China Home Prices Fall for 10th Month as Crisis Deepens. Market facing new stress with homebuyer mortgage boycott. Government relief efforts have yet to revive property sector – Bloomberg

On other countries:  

• [Canada] Canada Home Prices Slide Most Since at Least 2005 on Rates. Price decline accelerates to 1.9% in June; Toronto suburbs hit. Bank of Canada has increased borrowing costs aggressively – Bloomberg
• [Canada] Canadian home prices continue to plunge in June as higher rates pinch – Reuters
• [Canada] Homeowner Politics and Housing Supply – University of British Columbia
• [Canada] The housing market trend no one’s talking about is improving affordability for young buyers – The Globe and Mail
• [Canada] Toronto Offers Glimpse of Housing Pain as Renovations Slow Down. As rates rise, homeowners are cutting back on improvements. Housing market, with renos, made up 8.5% of GDP in pandemic – Bloomberg
• [Egypt] Egypt’s erratic house price movements – Global Property Guide
• [Mexico] Mexico’s housing market cooling – Global Property Guide
• [Romania] Sharp turnaround for Romania’s housing market – Global Property Guide
• [Singapore] Singapore Home Sales Fall to Lowest Since May 2020 on Costs. Purchases fell to 488 new units in June, versus 1,355 in May. Central banks are hiking up interest rate to curb inflation – Bloomberg
• [Singapore] Singapore Central Bank Sees Stable Residential Property Market – Bloomberg
• [United Kingdom] The Bank of England’s bizarre mortgage decision. With interest rates rising, now is not the time to scrap the test of affordability for home loans – FT
• [United Kingdom] UK house prices rising, despite slowing demand – Global Property Guide
• [Vietnam] Vietnam’s housing market gaining momentum – Global Property Guide

From the IMF’s latest report on Germany:

“The authorities have appropriately tightened macroprudential policy in the face of house price risks, but further actions are needed. Rapid rises in housing prices (12.4 percent between 2021Q4 and 2020Q4) have led to residential real estate valuations above fundamental levels for Germany overall, and even greater misalignment in larger cities. Nationwide, price-to-rent and price-to-income indicators suggested deviations from the long-run average of about 37 and 21 percent, respectively at end-2021, while estimates of an econometric model suggest overvaluations of 10–15 percent at 2021Q3. Meanwhile, a city-level panel model suggests greater overvaluation in the largest cities. Mortgage origination has also been strong and lending standards appear somewhat loose in certain segments. For example, according to different private sector data sources, between 7 and 20 percent of mortgage loans exceed the underlying property value (e.g., Text Figure 11). With these vulnerabilities in mind, the authorities appropriately raised the counter-cyclical capital buffer to 0.75 percent, from zero previously, and introduced a sectoral systemic risk buffer of two percent on loans secured by domestic residential real estate to apply from February 1, 2023. The authorities have also cautioned banks against taking excessive risks in mortgage lending. However, legal concerns and a lack of comprehensive data on lending standards remain obstacles to the activation of borrower-based measures, like the imposition of limits on loan-to-value ratios on new lending. As noted in the FSAP, precautionary use of borrower-based measures is warranted, and the authorities should remove obstacles to their activation by modifying the law on borrower-based measures, while in the interim strengthening guidance on lending standards (for example, encouraging banks to adhere to loan-to-value ratio limits through issuing a Guidance Note to banks). The authorities are also urged to accelerate the closure of data gaps and add income-based measures into the macroprudential toolkit.

Authorities’ Views

While generally sharing staff’s assessment of financial sector health and recommendations, the authorities assessed that risks in the housing market do not warrant the activation of borrower-based measures at this juncture. The authorities appreciated the FSAP’s stress tests of bank solvency and liquidity and found the results to be in line with their expectations. They are aware of U.S. dollar liquidity risks at some LSIs but judge that these are already sufficiently managed in the supervisory process. They emphasized the risk-sharing that takes place between savings and cooperative banks and their regional wholesale bank partners. The authorities highlighted the appropriateness of the macroprudential policy package announced by BaFin in January 2022. They noted that important data gaps on lending standards will be closed in 2023 and legislative proposals are being drafted to add income-based instruments to the toolkit. Furthermore, the Bundesbank has set up a project dedicated to monitoring the effects of the macroprudential policy package—inter alia its effects on lending standards. Existing private sector data on LTV and DSTI ratios currently provide mixed signals. On financial safety nets, the authorities considered that maintaining the existing multiple deposit guarantee schemes appropriately reflects the three-pillar structure of the German banking system.

A VoxEU article by Andy Atkeson, Jonathan Heathcote, Fabrizio Perri:

“The US net foreign asset position – measuring the difference between its foreign assets and liabilities – was negative, yet small, until 2007. This column shows that since then, it has deteriorated sharply to negative 40% of GDP, mostly as a result of changes in the market value of US-owned assets abroad and foreign-owned assets in the US. These valuation effects are explained by rising US equity values disproportionately benefitting foreign owners of US firms. Whether this is beneficial for depends on whether the profit rises are due to higher productivity or lower competition.

A country’s net foreign asset position measures the value of all the assets residents own abroad minus the value of assets foreigners own in the country. It is an important statistic, because all else equal, a higher net foreign asset position means a country can expect higher future net income from abroad, and can thus plan on running larger future trade deficits. One common way to decompose changes in the net foreign asset position is to recognise that the position can improve because a country, on net, acquires additional foreign assets – i.e. it runs a current account surplus – or because the market value of existing assets owned abroad increases relative to the value of foreign-owned assets in the country.

The US has long had a negative net foreign asset position. But until 2007 it was relatively small, never exceeding 20% of US GDP. In fact, the position was surprisingly small given the US history of large and persistent current account deficits. In influential papers, Gourinchas and Rey (2007, 2014) emphasised the importance of valuation effects in shaping the dynamics of the US net foreign asset position. At the time they were writing, these revaluations seemed to move consistently in favour of the US, especially during the mid-2000s. The net effect was that the US appeared to enjoy the special privilege of being consistently able to borrow without running up much debt. Gourinchas and Rey and others argued that this privilege reflected an asymmetry in cross-country portfolios, with Americans owning lots of direct investment and portfolio equity assets abroad – whose value tended to rise over time – while US liabilities consisted disproportionately of low return US government bonds. 

Our paper (Atkeson et al. 2022) updates the history of the US net foreign asset position, using data assembled by the US Bureau of Economic Analysis and the US Treasury in the Financial Accounts of the United States. We find that a lot has changed in the last 15 years. First and most notably, the US net foreign asset position has deteriorated very sharply, from negative 5% of US GDP in 2007, to negative 65% of US GDP by the third quarter of 2021. Such a large negative net position is unprecedented. What has driven this decline? What are the welfare implications for Americans?”

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