HOUSING MARKETS, BUSINESS CYCLES AND ECONOMIC POLICIES

Transcription

1 HOUSING MARKETS, BUSINESS CYCLES AND ECONOMIC POLICIES Austrian National Bank Workshop - Housing Market Challenges in Europe and the US - any solutions available? September 29, Vienna Christophe ANDRÉ OECD Economics Department

2 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

3 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

4 Real house prices Indices, 1995 = United Kingdom Denmark Spain Ireland Netherlands Norway

5 Real house prices (cont.) Indices, 1995 = France Australia Finland New Zealand Sweden

6 Real house prices (cont.) Indices, 1995 = United States Italy Japan Germany Canada Korea Switzerland

7 Real house prices Austria Index, 1995 = Austria Vienna

8 Change in real house prices Per cent

9 Cross-country coincidence of real house price booms Over 25 % increase in real house prices over 5 years Number of countries (out of 17)

10 180 Real house prices in the US and the United States euro area 1995=100 Per cent Euro area

11 Percentage change in real house prices in US regions

12 Percentage change in real house prices in euro area countries

13 OECD Real house prices and the business cycle

14 Price-Income and Price-Rent ratios Long-term average = 100 Germany Price-Income ratio Price-Rent ratio France Italy United Kingdom

15 Price-Income and Price-Rent ratios Long-term average = Australia Price-Income ratio Price-Rent ratio Spain Netherlands Denmark

16 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

17 Interest rates United States year government bond yields Conventional 30-year mortgages

18 Interest rates France year government bond yields Loans for house purchasing, Over 5 years

19 Interest rates convergence in the euro area 16 Austria Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal Spain

20 Policy rates and Taylor rule Per cent United States Per cent Euro area 7 Short-term interest rate Taylor rule 6 Short-term interest rate Taylor rule

21 Impact of interest rates Theoretically, the following relation holds between house prices and rents: P = R / (i a + τ + f π) Where R is the level of rents, i a the after-tax interest rate on mortgages, τ the property tax rate, f the depreciation rate and π the anticipated growth rate of rents.

22 Price-rent ratio United States Long-term average = Fundamental value Actual price-to-rent ratio

23 US Subprime market Per cent Subprime originations (rhs) Subprime loans, per cent of total originations (lhs) $ Billions

24 Price-rent ratio Spain Long-term average = Fundamental value Actual price-to-rent ratio

25 Trends in household debt (% of GDP) Avera ge Average 1995 Average ITA FIN FRA SWE ESP DEU CAN IRL JPN NZL AUS USA GBR NLD DNK

26 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?

27 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

28 Residential investment Per cent of GDP average SWE CHE JPN NOR ITA AUT DEU KOR GBR BEL USA FIN FRA AUS NLD ISL NZL DNK CAN GRC ESP IRL

29 Impact of interest rates on households consumption Consumption of durable goods Income effect Wealth effect Liquidity effect

30 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 Japa n Netherlands Spain United Kingdom United States Source: OECD estimat es (Catte et al., 2004).

31 Marginal propensity to consume housing wealth and mortgage market indicators

32 Estimates of the long-term equations with housing equity withdrawal Australia Canada Netherlands United Kingdom United States Marginal propensity to consume Financial wealth Housing wealth Housing equity withdrawal Sample 1989:1 1999:2 1970:1 2002:2 1981:2 2003:1 1978:1 2002:2 1977:1 2002:2 Source: OECD estimates (Catte et al., 2004).

33 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

34 Effects of mortgage market completeness

35 Share of housing loans with adjustable rates (%) 2006 or latest year available Outstanding loans New loans 0 DEU JPN NLD DNK CAN FRA USA SWE NZL GBR AUS ITA IRL FIN ESP

36 Share of owner-occupied housing (%)

37 Housing transaction costs Per cent of property value Mortgage loan costs Transaction costs other than taxes Taxes Belgium Greece Italy Spain France Germany Denmark Sweden United Kingdom

38 Housing taxation Taxes on capital gains Property taxes Deductibility of mortgage interest payments Taxation of rental property

39 Monetary policy and housing bubbles Identification of a bubble Effectiveness of interest rate hikes Rationale for preventive action

40 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

41 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

42 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

43 Real GDP and consumption during housing downturns 5 Real GDP Real household consumption Quarters after peak

44 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

45 Inflation and real house price adjustments Average annual Inflation rate DNK79-82 FRA81-84 CAN81-85 JPN73-77 CHE73-76 GBR73-77 FIN74-79 FIN89-93 ESP91-96 ITA92-98 FRA91-97 ITA81-86 IRE81-87 NZL74-80 SWE79-86 NOR86-93 SWE90-96 GBR89-95 DEU81-87 NLD78-85 ESP78-86 DNK86-93 DEU94-04 KOR91-01 CHE89-00 JPN Duration of real house price falls (quarters)

46 Financial system supervision Capitalisation Provisioning (pro-cyclical tendency) Underwriting policies Securitisation of housing loans

47 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