The IMF Research Bulletin summarizes key research from the IMF and includes a listing recent publications in different online series.

Abstract

The IMF Research Bulletin summarizes key research from the IMF and includes a listing recent publications in different online series.

Recent developments in global house prices have led to seemingly contradictory concerns about both overheating and slow recovery, reflecting house price booms in some countries and declining prices in others. This note discusses developments in global housing markets since the Great Recession—drawing on IMF staff assessments—and it also discusses attempts by policymakers to maintain stability in housing markets through macroprudential policies.

Housing Markets: A Global Overview

On average, global house prices continue to march upward slowly (IMF 2016). The IMF’s Global House Price Index—a simple average of real house prices for 64 countries—has edged higher for the past sixteen quarters (Figure 1). There is also a clear shift in momentum: between mid-2007 and mid-2012, far more countries had declining real house prices than increasing prices, but since mid-2012, these trends have reversed.

Figure 1:
Figure 1:

Global House Price Index

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Sources: Bank of International Settlements, Colliers International, European Central Bank, Federal Reserve Bank of Dallas, Savills, and national sources

The Quest for Stability in Housing Markets

More recently, global economic growth has slowed, especially in emerging markets, which may be affecting housing markets already. The latest available data shows that 7 out of 35 advanced economies are experiencing a decline in real house prices, compared with 10 out of 28 emerging economies (Figure 2). Over the past year, median real house price growth was nearly 4 percent in advanced economies, on average, compared with about 2.5 percent in emerging economies.

Figure 2a:
Figure 2a:

Real House Prices in Advanced Economies

(2015:Q3 or latest, in annual percent change)

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Sources: Bank of International Settlements, Colliers International, European Central Bank, Federal Reserve Bank of Dallas, Savills, Sinyi Real Estate Planning and Research, and national sources
Figure 2b:
Figure 2b:

Real House Prices in Emerging Economies

(2015:Q3 or latest, in annual percent change)

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Sources: Bank of International Settlements, Colliers International, European Central Bank, Federal Reserve Bank of Dallas, Savills, Sinyi Real Estate Planning and Research, and national sources

A Closer Look at Housing Markets

Understanding the disparate developments in housing markets across countries requires a closer look at the underlying developments and policies in each country. In its country surveillance, the IMF has been active in following house price developments, with coverage of housing sector issues having increased significantly in recent years (see Figure 3).

Figure 3:
Figure 3:

Number of Search Results for “House Prices” Using IMF eLibrary

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Source: IMF eLibrary

Out of 180 Article IV Consultations and Selected Issues Papers published in 2015, nearly half had some reference to housing and about a quarter had deeper analysis of housing markets and policy assessments and recommendations (Table 1).

Table 1.

IMF Coverage of the Housing Markets in 2015

article image
Source: IMF and author’s calculations

Three features of the recent IMF analysis of housing markets are noteworthy:

  • There is increasing use of disaggregated data to see if house price booms in countries are restricted to particular cities or regions.

  • There is increased discussion of the extent to which supply constraints are driving house prices.

  • Not surprisingly, there is extensive discussion of macroprudential measures that could be used to manage the housing market and attempts to assess the effectiveness of these measures.

The use of disaggregated data has proved important in assessing the extent to which house prices booms should be a source of concern. For instance, in the first half of 2015 in Australia, property prices increased by 16 percent year-on-year in Sydney, Australia, compared with 10 percent in other capital cities (IMF 2015a). The median price in Sydney corresponds to around nine times the average income, also the highest among capital cities. Within Belgium, there are big regional differences in the levels of house prices—with houses in Brussels being twice as expensive as those in Wallonia—recent rates of house price increases across regions have been quite comparable (IMF 2015b). In Canada much of the aggregate appreciation in house prices has been driven by Calgary’s housing market (though declines in oil prices are now taking their toll there), and increases in prices of single-family homes in Toronto and Vancouver (IMF 2015c).

In addition to increased discussion of within-country housing developments, the role of supply constraints in driving house prices is also receiving increased attention. In Israel, boosting housing supply, through measures such as providing support to local governments for construction of high density residential buildings, is considered important to contain further increases in housing prices (IMF 2015d). In Sweden, differences in housing supply conditions across cities have contributed to divergences in house prices. In the big cities, the housing stock has not expanded at a pace commensurate with demand that is driven by immigration inflows, rapid urbanization, and income growth (IMF 2015e).

Effectiveness of Macroprudential Measures

For the past few years, macroprudential policy has been the new policy buzzword and the “go-to” tool for many policymakers around the world. A growing literature on the use and effectiveness of macroprudential policy has sprung up.

In terms of policy related work, the IMF has put together a framework to inform country-specific advice on macroprudential policy (IMF 2013). Regarding the relationship with fiscal policy, one IMF report says that imposing taxes during a boom can make bubbles less likely; or the announcement of future tax relief on asset returns can support asset prices during a bust. During the global financial crisis, countries used tax measures to bolster house prices by removing stamp duties on housing transactions. Stamp duties have also been used in a number of countries to lean against house price appreciation. Such measures may have a role to play in particular when house prices are driven by capital inflows that by-pass the domestic financial system. However, these measures can also introduce further distortions and may ultimately increase price volatility.

The IMF staff’s advice on the use of macroprudential policy tools is addressed in a policy paper (IMF 2014c). Regarding which indicators can help in deciding when to loosen macroprudential policies, the policy paper says that they should be relaxed when there are signs of increased frictions in housing markets that result in a spiral of falling house prices, falling mortgage credit, and increasing defaults and foreclosures. In general, while a fall in house prices can be a useful early-warning indicator for the emergence of such frictions, a softening housing market alone is not a sufficient indicator for the relaxation of macroprudential tools, and staff should look for further evidence supporting the need for a relaxation of macroprudential tools.

Other papers have documented the use of macroprudential policies across countries and regions and have assessed their effectiveness. A new paper examines the use of macroprudential policies for 119 countries over the 2000–13 period (Cerutti and others 2016). They find that macroprudential policies can have some impact on growth in house prices.

Vandenbussche and others (2015) in an article in the Journal of Money, Credit and Banking investigate if macroprudential policy measures have had an impact on housing price inflation in Central, Eastern, and South-Eastern Europe (2015). They find that that some—but not all—measures had an impact. Zhang and Zoli (2014) find that Asian economies appear to have made greater use of macroprudential tools, especially housing-related measures, than their counterparts in other regions. Their analysis suggests that macroprudential policy and capital flow measures have helped curb housing price growth. The instruments that have been particularly effective in this regard include loan-to-value ratio caps, and housing tax measures.

In sum, while there is some evidence on effectiveness of macroprudential policies, it is mixed and it is difficult to be confident given the short time-series used in the econometric work. Therefore, country-by-country assessment and detailed case studies of the use and effectiveness of macroprudential measures are useful.

In terms of macroprudential policy recommendations, in Kuwait potential risks posed by rapid credit growth to the real estate sector can be addressed by sectoral capital requirements, and caps on loan-to-value ratios and debt-service-to-income ratios, adjusted at different stages of the credit cycle (IMF 2015f). In Namibia, IMF staff recommends loan-to-value limits on non-primary residences to constrain house purchases financed with mortgage loans for investment purposes (IMF 2015g).

Assessing Macroprudential Policies: A Tale of Two Countries

The challenges in implementing macroprudential policies, and evidence of their effectiveness, are well illustrated by a case study of Israel and the Netherlands (Ahir 2016). Both economies have been doing well in recent decades. This tends to put upward pressure on house prices because there are strong underlying supply constraints in both countries. Nevertheless, the house price booms in these economies in the period before the global financial crisis occurred for different reasons: in Israel, supply constraints played an important role, in the Netherlands it was easy credit. When the global financial crisis hit, both countries had to make policy adjustments.

In Israel, the central bank lowered the monetary policy rate from 3.75 percent at the beginning of 2008 to almost zero (0.25 percent) at the end of 2014. So with the monetary policy rate already lowered to counter a deceleration in GDP and to withstand the effects of the global economic downturn, Israel has had to implement macroprudential policies to deal with house price increases (See Figure 4a).

Figure 4a:
Figure 4a:

Israel: Real House Price Index and Macroprudential Policies

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Sources: Organisation for Economic Co-operation and Development (OECD) and Ahir 2016

In the Netherlands, macroprudential policies have been used to reduce existing vulnerabilities in the housing market. Prior to the global financial crisis, households in the Netherlands accumulated substantial mortgage debt at generous loan-to-value ratios (LTV), spurred in part by advantageous mortgage interest deductibility (MID). More specifically, during the upswing in housing prices in the Netherlands, LTV ratios on new mortgages averaged 114 percent in 2007, and over 120 percent in 2010. It is important to note that there was no formal LTV requirement on mortgage lending.

However, in 2009, real GDP declined by -3.3 percent. Also, house prices started to fall. To reduce the vulnerabilities in the housing market, the Netherlands also implemented several macroprudential policies (See Figure 4b).

Figure 4b:
Figure 4b:

Netherlands: Real House Price Index and Macroprudential Policies

Citation: IMF Research Bulletin 2016, 001; 10.5089/9781484316498.026.A002

Sources: OECD and Ahir 2016

What have been the effects of macroprudential policy in Israel? In Israel, even after implementing several measures of macroprudential policies, real house prices have continued to rise (Figure 4a). Here it is important to note three points.

First: Israel could not use monetary policy because raising the monetary policy rate would have lead to a deceleration in activity across all sectors of the economy. Second: it was hard to tighten macroprudential policies. An example is the difficulty in tightening the LTV ratios for first time home buyers since politically it was difficult to introduce regulations that make it difficult for young couples to buy a home. Third: there is evidence that the rise in house prices are explained largely by supply constraints. In Israel, the state owns 93 percent of the land, and there is a long process for obtaining licenses, building permits, and finishing construction.

So in the presence of a strong housing demand, but with supply constraints, house prices will tend to rise sharply. Recognizing this, the government has introduced measures to increase supply, including facilitating coordination between different housing bodies and initiating urban renewal programs.

What have been the effects of macroprudential policy in the Netherlands? In the Netherlands, macroprudential policies have started to reduce the vulnerabilities in the housing market, but challenges remain. In contrast to Israel, as noted earlier, the Netherlands was hit hard by the global financial crisis. So it had to implement macroprudential policies gradually in order not to destabilize the housing market in an environment of weak economic activity and falling house prices.

We can see this in the way the Netherlands plans to gradually bring down the LTV ratio and the tax deductibility of interest on mortgage loans. The LTV ratio will be gradually reduced by one percentage point per year until January 2018 when it will reach 100 percent. However, an LTV ratio of 100 percent would still be high compared to international levels. LTV ratios should be in place before household debt problems arise. So further work still remains in terms of LTV ratio limits.

Finally, even though the housing market is characterized by high LTV ratios, there are two specific risk mitigating factors that limit the risk of mortgage defaults in the Netherlands. The first factor is that Dutch banks have full recourse to all the assets and income of borrowers who default on their mortgage loan. The second factor is substantial savings.

There are four lessons that can be learned from the case of managing housing markets in Israel and the Netherlands. First: macroprudential policies work in reducing housing related risks to financial stability. Second: macroprudential policies can be politically and economically hard to implement. Third: macroprudential policies work better as ex-ante rather than ex-post tools. Fourth: the institutional setting of the market matters.

References

  • Ahir, Hites. 2016. Cooling Housing Markets: What Works?, EconoMonitor.

  • Ahir, Hites, Heedon Kang, and Prakash Loungani. 2014. “Seven Questions on Global Housing Markets,IMF Research Bulletin, September 2014 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Akerlof, George A., Olivier Blanchard, David Romer, and Joseph E. Stiglitz. 2014. What Have We Learned? Macroeconomic Policy after the Crisis. (Cambridge, Mass.: The MIT Press).

    • Search Google Scholar
    • Export Citation
  • Cerutti, E. Stijn Claessens, and Luc Laeven. 2016. “The Use and Effectiveness of Macroprudential Policies: New Evidence,Forthcoming, Journal of Financial Stability.

    • Search Google Scholar
    • Export Citation
  • Bruno, Valentina, Ilhyock Shim, and Hyun Song Shin. 2015. “Comparative Assessment of Macroprudential Policies, BIS Working Paper 502 (Basel: Bank for International Settlements).

    • Search Google Scholar
    • Export Citation
  • Claessens, Stijn. 2015. “An Overview of Macroprudential Policy Tools,Annual Review of Financial Economics, Annual Reviews.

  • Darbar, Salim; and Xiaoyong Wu. 2015. “Experiences with Macroprudential Policy—Five Case Studies,IMF Working Paper 15/123 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Dutch Banking Association. 2014. The Dutch Mortgage Market, May 26, 2014.

  • Hartmann, Philipp. 2015. “Real Estate Markets and Macroprudential Policy in Europe,Working Paper Series No. 1796, European Central Bank.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2016. Global Housing Watch, January 2016. http://www.imf.org/external/research/housing/report/pdf/0116.pdf

  • International Monetary Fund. 2015a. “Australia: Selected Issues,IMF Country Report No. 15/275 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015b. “Belgium: Selected Issues,IMF Country Report No. 15/71 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015c. “Canada: Article IV Consultation,IMF Country Report No. 15/22 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015d. “Israel: Article IV Consultation,IMF Country Report No. 15/261 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015e. “Sweden: Selected Issues,IMF Country Report No. 15/330 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015f. “Kuwait: Selected Issues,IMF Country Report No. 15/328 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015g. “Namibia: Article IV Consultation,IMF Country Report No. 15/276 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2015h. “Housing Recoveries: Cluster Report on Denmark, Ireland, Kingdom of the Netherlands—The Netherlands, and Spain,IMF Country Report No. 15/1 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2014a. “Housing Markets across the Globe: An Update,World Economic Outlook, October (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2014b. “Netherlands: Selected Issues,IMF Country Report No. 14/328 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2014c. “Staff Guidance Note on Macroprudential Policy,IMF Policy Paper, December (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2013. “Key Aspects of Macroprudential Policy,IMF Policy Paper, June (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund. 2013. “Israel: Selected Issues,IMF Country Report No. 14/48 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Vandenbussche, Jérôme, Ursula Vogel, and Enrica Detragiache. 2015. “Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central, Eastern and Southeastern Europe,Journal of Money, Credit and Banking. Volume 47, Issue S1.

    • Search Google Scholar
    • Export Citation
  • Zhang, Longmei and Edda Zoli. 2014. “Leaning Against the Wind: Macroprudential Policy in Asia,IMF Working Paper 14/22 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
IMF Research Bulletin, March 2016
Author: International Monetary Fund. Research Dept.