## Housing Markets, Financial Stability and the Economy

_IMF News, June 11, 2014_

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## Bibliographic details
- Published: June 11, 2014

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### 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.*

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## References

- [Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm)
- [People's Republic of China - Hong Kong Special Administrative Region and the IMF](http://www.imf.org/external/country/HKG/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [conference](https://www.imf.org/en/news/articles/2015/09/28/04/53/www.imf.org/housing)
- [Global House Watch page](https://www.imf.org/external/research/housing/index.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp060514_