{ "title": "Are Housing Markets Broken?", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir", "canonical": "https://www.imf.org/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir", "overlayPath": "/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/index.md", "summary": "Many people aspire to own their own home, but it’s becoming increasingly unaffordable", "sections": [ { "heading": "Overview", "content": "- Many people aspire to own their own home, but it’s becoming increasingly unaffordable.\n- Core framework: supply and demand remains the starting point for explaining rising house prices; income and population growth boost demand and, unless supply keeps up, house prices continue to rise.\n- Author: HITES AHIR is a senior research officer in the IMF’s Research Department.\n- Publication: F&D Magazine, December 2024." }, { "heading": "Demand amplification", "content": "- Housing differs from other goods: it is a major long-lasting purchase and investment, typically financed by borrowing, which makes demand sensitive to expectations and credit conditions.\n- Expectations and narratives:\n - Fear of missing out can lead people to buy homes at high prices if a narrative takes hold that tomorrow’s prices will be even higher.\n - Robert Shiller: house price bubbles can be driven by narratives and societal beliefs, creating collective expectations of ever-increasing prices; in 2003 he noted US house prices were substantially out of whack with people’s incomes and with rents.\n- Credit amplification:\n - Relaxation in lending standards can strongly boost house prices (as in the run-up to the global financial crisis in 2008–09).\n - Rising house prices increase the value of collateral, which can lead banks to extend more credit and further inflate the market.\n - Misconceptions that house prices always rise led to risky lending and investment and the sale of high-risk loans as securities, exacerbating downturns when market instability was exposed." }, { "heading": "Supply constraints", "content": "- Building a house requires financing, permits, approvals, and a lengthy construction period; even under the best circumstances, it takes time for supply to catch up with demand.\n- Canada example:\n - House prices (adjusted for inflation) have risen at an annual rate of about 5 percent since 2016, driven by steady growth in income and population, including strong immigration.\n - The Canada Mortgage and Housing Corporation estimates a shortage of 3.5 million homes for a population of about 41 million.\n - 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.\n - Policy steps: reducing permitting times, freeing up unused government land for homes, addressing a shortage of construction workers — but these measures will take time to yield results.\n- Zoning and land-use regulation:\n - Edward Glaeser and Joseph Gyourko show land-use restrictions limit density, curbing supply and driving up prices.\n - Heavily regulated cities like New York: house prices soar beyond construction costs.\n - Lightly regulated cities like Houston: plentiful affordable homes due to light regulations and ample land." }, { "heading": "Global forces", "content": "- Cross-border capital inflows are boosting housing demand in many countries, driven by:\n - An increase in wealth, particularly in emerging markets.\n - Historically low interest rates between 2008 and 2021 prompting investors to search for yield in property.\n - Capital flows to safe haven housing markets.\n- Evidence: prices in London’s high-end housing market tend to increase with geopolitical risks.\n- Policy responses to foreign demand:\n - Restrictions on foreign property buyers and regulation of short-term rentals.\n - New Zealand passed a law in 2018 barring foreigners from buying some residential properties.\n - Canada followed five years later with a similar ban and stiff fines for those who breach the rule." }, { "heading": "Market management and policy recommendations", "content": "- Multifaceted policy response needed because amplification of demand (price expectations, credit availability, capital flows) combined with stringent supply constraints can create large imbalances.\n- Managing credit availability:\n - Microprudential policies: risk weighting of mortgage assets requiring banks to keep capital against risky mortgage loans.\n - Macroprudential policies: limits on debt-service-to-income ratios; limits on loan-to-value ratios.\n- Monetary policy:\n - Central banks raise policy interest rates to increase mortgage rates, making housing loans more expensive, but monetary policy is a blunt tool as rate hikes affect all sectors.\n- Addressing foreign cash buyers:\n - Surcharge on nonresident buyers can reduce demand from cash-rich foreigners who bypass local lending rules.\n - Singapore example: in 2013 the authorities doubled the rate of stamp duty paid by foreigners to 60 percent to ease housing pressures.\n- Core policy conclusion:\n - When there are too few houses for sale, demand-focused policies alone (debt-to-income ratios, loan-to-value ratios, changes to interest rates) will not work.\n - The solution must come from supply-focused policies. Above all, we must build more homes.\n\nAre Housing Markets Broken? — HITES AHIR, F&D Magazine, December 2024.\n\n---\n\n Content in this bundle\n\n- Are Housing Markets Broken?\n - Are Housing Markets Broken? (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Are Housing Markets Broken? (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/bundle-manifest.json)", "Authors: HITES AHIR", "Published: December 3, 2024", "Many people aspire to own their own home, but it’s becoming increasingly unaffordable.", "Core framework: supply and demand remains the starting point for explaining rising house prices; income and population growth boost demand and, unless supply keeps up, house prices continue to rise.", "Author: HITES AHIR is a senior research officer in the IMF’s Research Department.", "Publication: F&D Magazine, December 2024.", "Housing differs from other goods: it is a major long-lasting purchase and investment, typically financed by borrowing, which makes demand sensitive to expectations and credit conditions.", "Expectations and narratives:", "Credit amplification:", "Building a house requires financing, permits, approvals, and a lengthy construction period; even under the best circumstances, it takes time for supply to catch up with demand.", "Canada example:", "Zoning and land-use regulation:", "Cross-border capital inflows are boosting housing demand in many countries, driven by:", "Evidence: prices in London’s high-end housing market tend to increase with geopolitical risks.", "Policy responses to foreign demand:", "Multifaceted policy response needed because amplification of demand (price expectations, credit availability, capital flows) combined with stringent supply constraints can create large imbalances.", "Managing credit availability:", "Monetary policy:", "Addressing foreign cash buyers:", "Core policy conclusion:", "**Are Housing Markets Broken?**" ], "related": [ { "title": "Are Housing Markets Broken?", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2024/12/b2b.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2024/12/b2b.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/fandd/article/2024/12/b2b.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/index.md", "json": "/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/index.json", "bundleManifest": "/en/publications/fandd/issues/2024/12/back-to-basics-are-housing-markets-broken-hites-ahir/bundle-manifest.json" }, "generatedAtUtc": "2026-09-15T19:31:39.929Z" }