Assessing House Prices with Prudential and Valuation Measures

IMF Working Papers, March 18, 2019

Source details

Canonical URL: Assessing House Prices with Prudential and Valuation Measures

Purpose: Provide tools for assessing house prices and housing valuation using widely available data and without complex econometric models.
Two main approaches developed:
- Borrowing capacity approach: The borrowing capacity of households, together with their down payment, implies how much housing they can attain.
- Intrinsic value approach: Property value is viewed as a discounted present value of adjusted net rental income.
Intended users: Households, financial markets, and macroprudential authorities.
Empirical illustration: Analysis of housing prices in the Czech Republic to assess the degree of market over- and undervaluation.
Date: March 18, 2019

Borrowing capacity approach
- Uses household borrowing capacity and down payment data to infer attainable housing amounts.
Intrinsic value approach
- Values property as the discounted present value of adjusted net rental income.
Data and modeling stance
- No complex econometric model required.
- Relies only on widely available data.
Purpose of indicators
- Guide understanding of house price developments for households, financial markets, and macroprudential authorities.

The paper develops indicators that can:
- Inform assessments of house price valuation (overvaluation and undervaluation).
- Be applied without sophisticated econometric techniques.
Application: Concepts are applied to the Czech Republic housing market to illustrate measurement and assessment of market valuation.

Indicators can guide:
- Household decisions regarding affordability and down payments.
- Financial market assessments of housing-related risk.
- Macroprudential authorities in evaluating housing market vulnerabilities and policy calibration.