## Are Housing Markets Broken?

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### Demand amplification
- Housing demand is sensitive to expectations and social narratives about future house prices; fear of missing out can lead to purchases at high prices.
- Robert Shiller identified bubbles driven by unrealistic expectations; in 2003 he noted US house prices were substantially out of whack with incomes and rents.
- Credit availability amplifies demand:
  - Relaxation in lending standards can boost house prices, as in the run-up to the global financial crisis in 2008–09.
  - Rising house prices increase collateral values, which can lead banks to extend more credit and further inflate prices.
- Global capital flows and investor searches for yield (including between 2008 and 2021) have contributed to demand pressures in some markets.

### Supply constraints
- Building homes requires financing, permits, approvals, and time; supply often lags behind demand.
- Canada case:
  - House prices (adjusted for inflation) have risen at an annual rate of about 5 percent since 2016.
  - The Canada Mortgage and Housing Corporation estimates a shortage of 3.5 million homes for a population of about 41 million.
  - To keep pace with growing demand, Canada must construct 500,000 houses every year, yet for the past two decades it has built only between 150,000 and 250,000 houses annually.
  - Authorities are reducing permitting times, freeing up unused government land for homes, and addressing a shortage of construction workers, but these measures will take time to yield results.
- Zoning and land-use restrictions limit density and curb supply:
  - Edward Glaeser and Joseph Gyourko show land-use restrictions drive prices above construction costs in heavily regulated cities (example: New York).
  - Cities with light regulations and ample land (example: Houston) have more affordable housing.

### Global forces and capital flows
- Capital inflows from foreign buyers boost housing demand in many countries, driven by:
  - An increase in wealth, particularly in emerging markets.
  - Historically low interest rates between 2008 and 2021 prompting investors to put savings into property.
  - Capital flows to safe-haven housing markets; research shows prices in London’s high-end market rise with geopolitical risks.
- Policy responses to foreign demand have included restrictions:
  - New Zealand passed a law in 2018 barring foreigners from buying some residential properties.
  - Canada followed five years later with a similar ban and stiff fines for breaches.
  - Singapore in 2013 doubled the rate of stamp duty paid by foreigners to 60 percent to ease housing pressures.

### Market management and policy tools
- Credit-side measures:
  - Microprudential policies such as risk weighting of mortgage assets require banks to keep capital against risky mortgage loans.
  - Macroprudential policies include limits on debt-service-to-income ratios and limits on loan-to-value ratios.
- Monetary policy:
  - Central banks raise policy interest rates to increase mortgage rates, but this is a blunt tool as it affects the whole economy.
- Targeted measures for nonresident buyers:
  - Surcharges on nonresident buyers can reduce demand from cash-rich foreign buyers who bypass local lending rules (example: stamp duty increase in Singapore to 60 percent).
- Policy mix must be multifaceted, combining demand-side safeguards with supply-side reforms.

### Key findings and recommendations
- Core finding: “High house prices can be largely explained by the simple fact that there are too few houses for sale.”
- Demand amplification (expectations, credit availability, capital flows) combined with stringent supply constraints creates substantial imbalances.
- Demand-focused interventions alone (debt-to-income ratios, loan-to-value ratios, or interest-rate changes) will not solve high prices if supply remains tight.
- Principal recommendation: supply-focused policies are essential—above all, build more homes and address regulatory and capacity constraints that retard construction.

*Hites Ahir is a senior research officer in the IMF’s Research Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/12/b2b.pdf_