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 =100 450 400 United Kingdom Denmark Spain Ireland Netherlands Norway 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 Finland New Zealand Sweden 200 150 100 50 0 1970 75 80 85 90 95 2000 05
Real house prices (cont.) Indices, 1995 =100 180 United States Italy Japan Germany Canada Korea Switzerland 160 140 120 100 80 60 40 1970 75 80 85 90 95 2000 05
1987 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 Real house prices Austria Index, 1995 =100 140 130 120 110 100 90 80 70 60 50 40 Austria Vienna
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
180 Real house prices in the US and the United States euro area 1995=100 Per cent Euro area 160 140 120 100 80 60 40 1970 75 80 85 90 95 2000 05
Percentage change in real house 120 100 80 60 40 20 0 prices in US regions 1995-2006
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 180 160 Price-Income ratio 140 120 100 80 Price-Rent ratio 60 1970 75 80 85 90 95 2000 05 France 180 160 140 120 100 80 60 1970 75 80 85 90 95 2000 05 Italy 180 160 140 120 100 80 60 1970 75 80 85 90 95 2000 05 United Kingdom 180 160 140 120 100 80 60 1970 75 80 85 90 95 2000 05
Price-Income and Price-Rent ratios Long-term average = 100 220 200 180 160 140 120 100 80 60 40 Australia Price-Income ratio Price-Rent ratio 1970 75 80 85 90 95 2000 05 220 200 180 160 140 120 100 80 60 40 Spain 1970 75 80 85 90 95 2000 05 220 200 180 160 140 120 100 80 60 40 Netherlands 1970 75 80 85 90 95 2000 05 220 200 180 160 140 120 100 80 60 40 Denmark 1970 75 80 85 90 95 2000 05
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 14 12 10-year government bond yields Loans for house purchasing, Over 5 years 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 16 Austria Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal Spain 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 Per cent United States Per cent Euro area 7 Short-term interest rate Taylor rule 6 Short-term interest rate Taylor rule 6 5 5 4 4 3 3 2 2 1 1 0 2000 01 02 03 04 05 06 07 08 0 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 / (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.
Price-rent ratio United States Long-term average = 100 140 Fundamental value 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 25 20 Subprime originations (rhs) Subprime loans, per cent of total originations (lhs) $ Billions 700 600 500 15 400 10 300 5 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 0
Price-rent ratio Spain Long-term average = 100 200 180 160 140 120 100 80 60 Fundamental value Actual price-to-rent ratio 40 1995 96 97 98 99 2000 01 02 03 04 05 06 07
Trends in household debt (% of GDP) 140 1985 1995 2005 120 100 80 Avera ge 2005 60 40 Average 1995 Average 1985 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 12 2006 2007 1980-2005 average 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 0.02.. 0.07 0.03 Canada 0.03 0.03 0.06 0.04 France...... 0.02 Germany.. 0.01.. 0.02 Italy.. 0.01 0.01 0.01 Japa n 0.01.. 0.01 0.07 Netherlands 0.02.. 0.08 0.06 Spain 0.01.. 0.02 0.02 United Kingdom 0.08 0.03 0.07 0.04 United States.. 0.02 0.05 0.03 -- Source: OECD estimat es (Catte et al., 2004).
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 Marginal propensity to consume Financial wealth 0.33 0.06 0.11 0.08 0.03 Housing wealth -- 0.05 -- -- -- Housing equity withdrawal 0.63 0.63 0.20 0.89 0.20 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).
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 100 90 80 70 60 50 40 30 20 10 Outstanding loans New loans 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 16 14 Mortgage loan costs Transaction costs other than taxes 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 5 Real GDP 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 18 16 14 12 10 8 6 4 2 0 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 JPN91-05 10 15 20 25 30 35 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