Housing Markets, Financial Stability and the Economy
IMF News, June 11, 2014
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- Published: June 11, 2014
Opening remarks — key messages
- Three main points made:
- Housing is an essential sector but a recurrent source of vulnerabilities and crises; recent global housing recovery needs guarding against another unsustainable boom.
- Detecting over-valuation in housing markets remains more art than science; broad measures (house price to rent ratios) provide a first pass but detailed analysis and judgment are required.
- The policy toolkit to manage housing booms is still under construction; a variety of tools show some short-run success, but more analysis and sharing of experience are needed.
Role of the housing sector — findings and evidence
- Housing functions and importance:
- Housing satisfies basic needs and is an important component of investment and wealth.
- In the United States, real estate account for roughly a third of the total assets held by the nonfinancial private sector.
- In France, less than a quarter of households own stocks but nearly 60 percent are homeowners.
- Mortgage markets are important in the transmission of monetary policy; adequate housing facilitates labor mobility and adjustment to shocks.
- Historical links to crises:
- IMF research: of the nearly 50 systemic banking crises in recent decades, more than two thirds were preceded by boom-bust patterns in house prices.
- Example: in Ireland, government bailouts of banks from the housing collapse ate up 40 percent of the country’s GDP.
- Recessions in OECD countries are more likely given a house price bust; such recessions tend to be much deeper and generate more unemployment than normal recessions.
Detecting overvaluation in housing markets — indicators and judgments
- Recent developments:
- The IMF’s Global House Price Index has increased for the last seven quarters in a row.
- Over the past year, 33 out of 51 countries in the index showed increases in house prices.
- Long-run valuation ratios:
- Theory: house prices, rents, and incomes should move in tandem; ratios of house prices to rents and incomes provide an initial check on valuation.
- Among OECD countries, these ratios remain well above the historical averages for a majority of countries (examples: Australia, Belgium, Canada, Norway and Sweden).
- Long-run relationships act as an anchor, but house prices often drift away strongly and for long periods; supply constraints and demand momentum can prolong deviations.
- Importance of credit growth and leverage:
- IMF research highlights credit growth as a distinguishing feature of real estate booms that end badly: the coincidence of housing booms and rapid increases in leverage and exposure.
- During the global financial crisis, nearly all countries with “twin booms” in real estate and credit markets—21 out of 23 countries analyzed—suffered either a financial crisis or a severe drop in GDP growth relative to pre-crisis performance.
- Of the seven countries that experienced a real estate boom but not a credit boom, only two went through a systemic crisis and, on average, had relatively mild recessions.
- Country-specific assessments:
- IMF staff provided detailed judgments for Australia, Israel and Canada where broad valuation measures are high.
- Assessments also made for many emerging market economies in Asia and Latin America where mortgage credit and house price growth remain strong.
- Case example: Belgium—despite high valuation ratios, IMF concluded risks of a sharp correction appear contained.
- Conclusion: policy response cannot be “one size fits all.”
Constructing a policy toolkit — tools, evidence, and limitations
- Framing:
- Use of acronym “MiP, MaP, MoP”:
- MiP = microprudential policies (resilience of individual institutions).
- MaP = macroprudential policies (resilience of the system).
- MoP = monetary policy.
- Monetary policy must be more concerned with financial stability and housing markets than before; era of “benign neglect” of house price booms is over.
- Macroprudential tools used:
- Limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios; sectoral capital requirements.
- Examples and chronology:
- Hong Kong SAR has operated an LTV cap since the early 1990s and introduced a DTI cap in 1994.
- Korea introduced LTV limits in 2002 and DTI limits in 2005.
- During and after the global financial crisis, over 20 advanced and emerging economies adopted similar measures.
- Evidence of effectiveness:
- These measures are somewhat effective in cooling off both house prices and credit growth in the short run by breaking the financial accelerator mechanism.
- Need for fine tuning: market participants can circumvent limits; country-specific design matters (e.g., Canada distinguishes owner-occupied vs. investor mortgages).
- Sectoral capital requirements:
- Stricter capital requirements on loans to real estate force banks to hold more capital and can increase resilience.
- Used in advanced economies (Ireland, Norway) and emerging markets (Estonia, Peru, Thailand).
- Evidence mixed on ability to curb credit growth; some IMF work finds higher capital requirements on particular mortgage groups had success in curbing house price growth in Bulgaria, Croatia, Estonia, and Ukraine.
- Reasons for limited effectiveness:
- When banks hold capital well above regulatory minimum, lenders may not change behavior in response to higher risk weights.
- Intense competition may lead lenders to internalize higher capital costs rather than raise lending rates.
- Other tools and constraints:
- Fiscal tools: stamp duty used in Hong Kong SAR and Singapore to reduce demand from foreigners outside LTV/DTI perimeters.
- Supply-side constraints: when high prices reflect supply bottlenecks or foreign cash inflows bypassing credit intermediation, demand-focused tools may be limited; measures to increase housing supply are needed.
- Role of monetary policy:
- Policy interest rates are often seen as a blunt tool for containing house price booms, but housing booms have often coincided with generalized private credit booms, suggesting monetary policy can be important in support of macroprudential policies.
- Practical constraint: in many cases policy interest rates need to remain low to support economic recovery.
Policy recommendations and strategic approach
- Move from “benign neglect” to an “all of the above” approach:
- Use an interlocking set of tools (microprudential, macroprudential, monetary, fiscal, and supply-side measures) to overcome shortcomings of any single policy tool.
- Emphasize evidence-based, country-specific design:
- Combine broad valuation measures with indicators such as credit growth, household indebtedness, lender characteristics, and financing methods to form policy judgments.
- Improve knowledge sharing and data:
- Continue detailed country assessments and reporting (World Economic Outlook, Global Financial Stability Report, Executive Board reports).
- Work with other agencies to improve housing statistics and share cross-country experience.
- International coordination:
- Maintain open dialogue and international coordination, since housing booms in one country can be fed by credit market developments abroad.
- IMF commitment:
- Assessments of housing markets are becoming a regular feature of IMF country reports and flagship publications; IMF to provide a home for this work on a new Global House Watch page.
Conclusion — summary
- Housing booms differ across countries and time, but busts frequently damage financial stability and the real economy.
- Policy tools are evolving; evidence on effectiveness is nascent and interactions are complex, so proactive, coordinated, and multi-tool responses are required.
- Ongoing analysis, international coordination, and improved housing statistics are essential to better contain housing booms.
Opening Remarks at the Bundesbank/German Research Foundation/IMF Conference — Min Zhu, Deputy Managing Director, IMF; June 5, 2014.