Managing House Price Booms in Emerging Markets
IMF Blog, December 10, 2014
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- Authors: Min Zhu
- Published: December 10, 2014
Overview / House Price Index
- Author: Min Zhu
- Date: December 10, 2014
- For the past decade, house prices have steadily increased in the vast majority of the 30 countries that make up the IMF’s House Price Index for Emerging Markets.
- The index shows a lull in the aftermath of the global financial crisis, followed by an increase for nine consecutive quarters since 2012.
- This run-up is described as four times as fast as that in advanced economies.
- The run-up would be even more pronounced if larger countries in the group such as China and India receive greater weight in the index.
Housing and Credit Booms: double trouble?
- Historical concern: house price surges accompanied by booms in credit availability are more likely to end in busts; recoveries from those busts are slower and more costly in terms of lost income.
- Since 2009, house price increases have been higher in countries (e.g., China) where there has been more rapid growth in credit availability.
- Statistically, credit growth can account for nearly half of the variation in house price increases across countries since 2009.
- Figure references (in source): Figure 1 (index), Figure 2 (credit growth).
Macroprudential policies and other tools
- Policymakers are deploying a trinity of policies: monetary policy, microprudential policies, and macroprudential policies.
- Macroprudential measures include both broad-based tools and sectoral tools targeted at housing markets:
- Limits on the loan-to-value (LTV) ratio, which cap the size of the mortgage loan relative to the value of the property associated with the loan.
- Limits on the debt-service to income (DSTI) ratio, which restrict the size of a debt service payment to a fixed share of household income.
- Sectoral capital requirements, which force lenders to hold extra capital against loans to a specific sector, such as real estate.
- Provisioning requirements, which force lenders to build reserves against an eventual nonpayment of loans to particular sectors.
- Purpose: curb unsustainable credit build-up to prevent house price bubbles, or ensure lenders have adequate buffers in the event of a bust.
- Emerging markets are active users of these tools; macroprudential tools have been actively used since 2000, including by many Asian economies.
- Conference context: IMF and the Indian Institute of Management in Bangalore, India.
Evidence on effectiveness and important nuances
- IMF staff speech at the Bangalore conference provides evidence of overall success in curbing both credit growth and house price growth.
- Important caveats:
- Measures to curb credit growth were less effective when there was high demand for houses from foreign buyers using cash instead of borrowing from the banking system.
- Dampening house price acceleration was not always successful unless measures were fairly targeted.
- Example: Korea had to specifically target the Gangnam suburb to curb speculative pressures on house prices.
Housing finance, supply challenges, and reform areas
- Housing finance systems remain underdeveloped in many emerging markets; providing affordable housing is a key challenge.
- Market mismatch: in many cities (e.g., many cities in India) there is excess supply in the high-end segment and lack of supply in the low and middle segments.
- Conference participation includes experts on sustainable housing finance systems, public-private partnerships, and managing urbanization.
- Cross-country variation in mortgage market size can be traced to:
- Differences in legal systems (weak lender protection results in fewer loans).
- Strength of credit information systems.
- Onerousness of the property registration process.
- Country’s history of macroeconomic instability.
- Country examples and exact figures:
- Brazil has a small mortgage market (under 5 per cent of GDP).
- Malaysia mortgage loans are over 30 percent of GDP.
Key takeaways and policy implications
- Twin booms in house prices and credit raise the risk of costly busts; monitoring both is essential.
- Macroprudential policies—broad-based and sectoral—are an important complement to monetary and microprudential policies.
- Targeting matters: sectoral and geographically targeted measures can be necessary to address localized speculative pressures.
- Nonfinancial considerations (legal frameworks, credit information, property registration, macroeconomic stability) influence the depth of mortgage markets and should be part of reform efforts.
- Policymakers face the dual mandate of expanding access to housing while avoiding excessive risk-taking that could lead to severe losses.
Source: Managing House Price Booms in Emerging Markets — Min Zhu, December 10, 2014.
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- 新兴市场房价上涨的管理; iMFdirect博客; 2014年12月10日
