Christophe Andre: Housing Markets, Business Cycles and

HOUSING MARKETS, BUSINESS
CYCLES AND ECONOMIC POLICIES
Austrian National Bank Workshop - Housing
Market Challenges in Europe and the
US - any solutions available?
September 29, 2008 - Vienna
Christophe ANDRÉ
OECD Economics Department
Main issues
• An overview of recent evolutions in OECD
housing markets
• The role of housing markets in monetary policy
transmission
• Asset prices and monetary policy
• Systemic risk and financial system supervision
The current housing cycle
• The increases in recent years have pushed house
prices above previous peaks almost everywhere
• The duration of the run-up has been longer than
in previous cycles
• The number of countries that have experienced
large and sustained increases is also without
precedent
• This house price cycle has been disconnected
from the business cycle
Real house prices
Indices, 1995 =100
450
United Kingdom
Denmark
Spain
Ireland
Netherlands
Norway
400
350
300
250
200
150
100
50
0
1970
75
80
85
90
95
2000
05
Real house prices (cont.)
Indices, 1995 =100
250
France
Australia
New Zealand
Sweden
Finland
200
150
100
50
0
1970
75
80
85
90
95
2000
05
Real house prices (cont.)
Indices, 1995 =100
United States
Germany
Switzerland
180
Italy
Canada
Japan
Korea
160
140
120
100
80
60
40
1970
75
80
85
90
95
2000
05
Real house prices – Austria
Index, 1995 =100
140
130
120
110
100
90
80
70
Austria
Vienna
60
50
08
07
06
05
04
03
02
01
2000
99
98
97
96
95
94
93
92
91
90
89
88
1987
40
Change in real house prices
1995-2007
Per cent
300
250
200
150
100
50
0
-50
Cross-country coincidence of real house
price booms
Over 25 % increase in real house prices over 5 years
Number of countries (out of 17)
14
12
10
8
6
4
2
0
1976
80
85
90
95
2000
05
Real house prices in the US and the
euro area
1995=100
Per cent
United States
180
Euro area
160
140
120
100
80
60
40
1970
75
80
85
90
95
2000
05
Percentage change in real house
prices in US regions
1995-2006
120
100
80
60
40
20
0
Percentage change in real house
prices in euro area countries
1995-2007
257
120
100
80
60
40
20
0
-20
-40
OECD Real house prices and the
business cycle
Price-Income and Price-Rent ratios
Long-term average = 100
Germany
France
180
180
160
160
Price-Income ratio
140
140
120
120
100
100
80
60
1970
80
Price-Rent ratio
75
80
85
90
95
2000
05
60
1970
75
Italy
180
160
160
140
140
120
120
100
100
80
80
60
1970
60
1970
80
85
90
85
90
95
2000
05
2000
05
United Kingdom
180
75
80
95
2000
05
75
80
85
90
95
Price-Income and Price-Rent ratios
Long-term average = 100
Australia
220
200
180
160
140
120
100
80
60
40
1970
Spain
Price-Income ratio
Price-Rent ratio
75
80
85
90
95
2000
05
220
200
180
160
140
120
100
80
60
40
1970
75
80
Netherlands
220
200
180
160
140
120
100
80
60
40
1970
75
80
85
90
85
90
95
2000
05
95
2000
05
Denmark
95
2000
05
220
200
180
160
140
120
100
80
60
40
1970
75
80
85
90
Interest rates developments
• Reduction in real interest rates
• Reduction in nominal interest rates
• In some countries, reduction in spreads on
mortgages
• In some countries, increase in the
proportion of adjustable rate loans
Interest rates – United States
12
10-year government bond yields
Conventional 30-year mortgages
10
8
6
4
2
0
1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08
Interest rates – France
10-year government bond yields
14
Loans for house purchasing, Over 5 years
12
10
8
6
4
2
0
1990 91
92
93
94
95
96
97
98
99 2000 01
02
03
04
05
06
07
08
Interest rates convergence in the
euro area
Austria
Germany
Netherlands
Belgium
Greece
Portugal
Finland
Ireland
Spain
France
Italy
16
14
12
10
8
6
4
2
0
1990 91
92
93
94
95
96
97
98
99 2000 01
02
03
04
05
06
07
08
Policy rates and Taylor rule
United States
Euro area
Per cent
Per cent
6
7
Short-term interest rate
Taylor rule
Short-term interest rate
6
Taylor rule
5
5
4
4
3
3
2
2
1
1
0
0
2000
01
02
03
04
05
06
07
08
2000
01
02
03
04
05
06
07
08
Impact of interest rates
Theoretically, the following relation holds
between house prices and rents:
P = R / (ia + τ + f – π)
Where R is the level of rents, ia the after-tax
interest rate on mortgages, τ the property
tax rate, f the depreciation rate and π the
anticipated growth rate of rents.
Price-rent ratio
United States
Long-term average = 100
Fundamental value
140
Actual price-to-rent ratio
130
120
110
100
90
80
70
60
1995
96
97
98
99
2000
01
02
03
04
05
06
07
US Subprime market
Per cent
$ Billions
25
700
Subprime originations (rhs)
600
Subprime loans, per cent of total originations (lhs)
20
500
15
400
300
10
200
5
100
0
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
Price-rent ratio
Spain
Long-term average = 100
Fundamental value
200
Actual price-to-rent ratio
180
160
140
120
100
80
60
40
1995
96
97
98
99
2000
01
02
03
04
05
06
07
Trends in household debt (% of GDP)
1985
140
1995
2005
120
100
80
60
Avera ge 2005
Average 1995
Average 1985
40
20
0
ITA
FIN
FRA SWE
ESP
DEU
CAN
IRL
JPN
NZL
AUS
USA
GBR
NLD
DNK
Housing markets and monetary policy
• Well-developed mortgage markets tend to
reinforce monetary policy transmission
• To what extent should monetary policy
take into account developments on
housing markets?
Monetary policy transmission
mechanisms
• Impact on residential investment
• Increase in housing wealth: impact on
private consumption through wealth and
liquidity effects linked to housing equity
withdrawal
Residential investment
Per cent of GDP
16
14
2006
2007
1980-2005 average
12
10
8
6
4
2
0
SWE CHE JPN NOR ITA AUT DEU KOR GBR BEL USA FIN FRA AUS NLD ISL NZL DNK CAN GRC ESP IRL
Impact of interest rates on
households consumption
• Consumption of durable goods
• Income effect
• Wealth effect
• Liquidity effect
Short-term and long-term impact of financial
and housing wealth on consumption
Estimated short-term and long-term marginal propensities to
consume out of financial and housing wealth
Short-term
Long-term
Housing
Financial
Housi ng
Financial
Australia
Canada
France
Germany
Italy
0.02
0.03
..
0.07
0.06
0.01
0.03
0.04
0.02
0.02
0.01
Japa n
Netherlands
Spain
United Kingdom
United States
0.01
0.02
0.01
0.08
0.01
0.08
0.02
0.07
0.05
0.07
0.06
0.02
0.04
0.03
..
..
..
..
--
Source: OECD estimat es (Catte et al., 2004).
0.03
..
0.01
0.01
..
..
..
0.03
0.02
..
..
Marginal propensity to consume housing
wealth and mortgage market indicators
Estimates of the long-term equations
with housing equity withdrawal
Australia
Canada
Netherlands United Kingdom United States
Financial wealth
0.33
0.06
0.11
0.08
0.03
Housing wealth
--
0.05
--
--
--
0.63
0.63
0.20
0.89
0.20
1989:1 1999:2
1970:1 2002:2
1981:2 2003:1
1978:1 2002:2
1977:1 2002:2
Marginal propensity to consume
Housing equity withdrawal
Sample
Source: OECD estimates (Catte et al., 2004).
Mortgage market completeness
Main elements
•
•
•
•
•
•
Loan-to-value ratio
Loan terms
Adjustable-rate loans
Loans with flexible repayments
Possibility of housing equity withdrawal
Subprime loans
Effects of mortgage market
completeness
Share of housing loans with
adjustable rates (%)
2006 or latest year available
Outstanding loans
100
New loans
90
80
70
60
50
40
30
20
10
0
DEU
JPN
NLD
DNK
CAN
FRA
USA
SWE
NZL
GBR
AUS
ITA
IRL
FIN
ESP
Share of owner-occupied housing (%)
90
80
70
60
50
40
30
Housing transaction costs
Per cent of property value
18
Mortgage loan costs
16
Transaction costs other than taxes
14
Taxes
12
10
8
6
4
2
0
Belgium
Greece
Italy
Spain
France
Germany
Denmark
Sweden
United
Kingdom
Housing taxation
• Taxes on capital gains
• Property taxes
• Deductibility of mortgage interest
payments
• Taxation of rental property
Monetary policy and housing bubbles
• Identification of a bubble
• Effectiveness of interest rate hikes
• Rationale for “preventive” action
Identification of a bubble
• Only 2/3 of housing booms in OECD
countries since 1970 have been followed by
sharp falls
• Useful indicators: Price/Rent,
Price/Income ratios, level of housing
investment, credit growth
• Implies an information avantage of central
banks over private market participants
Effectiveness of monetary policy
action to stabilise asset prices
• Size of necessary rate hikes
• Crowding-out effects
• Risk of reducing the clarity of monetary
policy objectives
Rationale for preventive action
• Housing crises often result in high
macroeconomic costs
• Deflation risks
• Risks for the stability of the financial
system
• Zero bound on nominal interest rates
Real GDP and consumption during
housing downturns
Real GDP
5
Real household consumption
4
3
2
1
0
-1
-12 -11 -10 -9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10 11 12
Quarters after peak
Impact of housing crises
• Housing wealth is much more widely
distributed than financial wealth
• House prices are less volatile than equity
prices
• Housing wealth is more often used as
collateral for borrowing
• Housing crises often coincide with banking
crises
Inflation and real house price
adjustments
Average annual
Inflation rate
20
GBR73-77
18
16
NZL74-80
14
JPN73-77
F IN74-79
12
ITA81-86
DNK79-82
10
ESP78-86
F RA81-84
8
SWE79-86
IRE81-87
CAN81-85
6
NOR86-93
SWE90-96
CHE73-76
FIN89-93
ESP91-96
4
DNK86-93
ITA92-98
2
KOR91-01
NLD78-85
FRA91-97
GBR89-95
DEU81-87
CHE89-00
DEU94-04
0
10
15
20
25
30
35
JPN91-05
40
45
50
55
60
Duration of real house price falls (quarters)
Financial system supervision
• Capitalisation
• Provisioning (pro-cyclical tendency)
• Underwriting policies
• Securitisation of housing loans
Conclusions
• Housing markets play an important role in
the transmission of monetary policy
• Well-developed mortgage markets tend to
reinforce this role
• Monetary policy is a rather crude
instrument to deal with housing bubbles
• Financial system regulation and
supervision have a crucial role to play in
avoiding crises