Mind the data gap: ongoing development of the BIS commercial property price statistics

1. Mind the data gap: ongoing development of the BIS commercial property price statistics Robert Szemere Monetary and Economic Department, BIS International Conference on Real Estate StatisticsLuxembourg, 20-22 February 2019 The views expressed are those of the author and do not necessarily reflect those of the BIS

2. Outline • CPPI as input for policy makers & economic/financial stability analysis • Collecting both CPPIs and RPPIs? • G20 Data Gaps Initiative • CPPIs at the BIS: 4.1 BIS activities with CPPIs4.2 Inventory4.3 Publication • Looking ahead5.1 Targeted indicators5.2 Sources5.3 Cooperation between compilers, national central bank and the BIS

3. 1. Widespread interest for policy makers… • Central banks • Demand and inflation • Monetary policy transmission mechanisms (eg banking intermediation) • Micro supervisors • Banks • Other Financial Institutions (regulated or not: shadow banks) • Macro prudential authorities – systemic risk • Across the financial system • Over time (pro cyclicality)

4. 1. CPPI information and financial stability assessments • Financing cycle: self-reinforcing forces between • Asset prices • Financial conditions eg risk premium / appetite • Credit demand & supply • Perceived loan quality • Impact on financial system’s soundness: commercial property as a guarantee and an asset (when invested directly) • Turn of the cycle • Underlying vulnerabilities as financial conditions tighten • Level of indebtedness matters (non-linearity)

5. 1. Example: increase in CPPI and build up of financial fragilities higher asset/collateral values increase of commercial property prices Build up of financial fragilities Pro-cyclicality during expansion commercial property developers’ balance sheets look stronger • increased corporate borrowing & banklending

6. 1. Example: decline in CPPI and stress in the financial system lower value of assets/collaterals fall of commercial property prices Pro-cyclicality during recession • stricter borrowing conditions thus less new credit balance sheets of corporates deteriorates Higher risks of commercial property developers’ bankruptcy and banks’ losses

7. 2. Collecting both residential and commercial property prices? • Significant efforts required for compiling CPPIs in addition to RPPIs… • … noting still important challenges faced in collecting RPPIs • Worth only if the information content is • Specific (ie different from RPPIs) • Reliable (ie not too uncertain) • Useful (for policy)

8. 2. Specific? Information content may not differ too much • Both prices are basically reflecting the same 2 cost components • Land (location) • Structure (construction costs) • Common forces driving residential and commercial prices • State of the economy • Financing conditions • Building costs • Structural factors (building permission, land availability, etc)

9. 2. Despite limitations, CPPIs can provide specific, useful information… • Different economic purposes • Commercial property: underlying activity is to generate income streams (eg rented properties, properties used in the production process such as retail premises, factories, offices) • Business investment nature • Residential property: household primary need for shelter • Less rapid obsolescence • Role of owner occupation rate

10. 2. … with distinct, important features • Greater correlation with business cycles • Business investment highly cyclical (compared to household demand) • Shorter financing conditions (maturity, leveraged finance) • More amplitude (volatility) • Rates of depreciation in bad times / rapid obsolescence of non-occupied assets • Bankruptcy procedures (firms versus households) • Fluctuations of banks’ exposures (provisions / losses)

11. 2. As always, let the data speak! The US example CPPI more volatile than RPPI

12. 3. G20 Data Gaps Initiative: Phase 2 But G20 DGI isonlythestartingpoint Aim: tocoverasmany countries aspossible, similarlyto Residential Property Price Indicators, wherethe BIS publishesdatafor 60 countries & publishingconsistentdataacross countries.

13. 4.1 BIS activities with CPPIs • To monitor national developments by supporting the compilation and publication of CPPIs by national authorities. • Tocollectdata and metadatafrom all sources but alwaysthroughthe national centralbank • To publish data based on a common metadata template • To promote research by using CPPIs: For example BIS Annual Report, Quarterly Bulletins and Working Papers • Upcomingpublication: (March 2019) • Irving Fisher Committee Report: Mind the data gap: commercial property prices for policy • Largelybased on theWorkshop on Commercial Property Price Indices organised by the Central Bank of Turkey.

14. 4.2 Data availability varies across countries 5 various dimensions • Geographical area: whole country, capital, major cities • Property: Industrial, retail, office, logistics • Compiler: statistical office, central bank, ministry, private source • Source of data: transactions, appraisals, financial market • Frequency: annual, half-yearly, quarterly, monthly Consequently CPPIs are not easily comparable across jurisdictions

15. 4.2 Country coverage: 16 jurisdictions, with only 8 G20s* http://www.bis.org/statistics/pp_commercial.htm G20s highlighted

16. 4.3 Publication on the BIS website

17. 5.1 Looking ahead: targeted indicators • 1. Aggregate CPPI for the whole country: Why: to capture the entire market, useful for macro-economic analysis • 2. Aggregate CPPI for capital city/financial centre or major cities: Why: to “catch” credit booms, useful for financial stability analysis • 3 & 4 CPPI excluding rented flats* for the whole country and for capital city/financial centre or major cities: • Why: excluding the overlap between residential and commercial segments • *CPPI excluding rented flats will be compiled on a best effort basis as: • Flats rented out by households may not be registered • Rented flats, shops and offices may co-exist in the same building

18. 5.2 Sources • Transactions • Appraisals of lenders (eg banks) • Appraisals of property price information vendors • Financial market indicators (eg REITs) • Examplesof CPPIs based on multiple sources • ECB: appraisals, transactions • Japan, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT): transactions, REITs • Advantage: best possible coverage from complementary information

19. 5.3 How to support BIS efforts to collect and publish CPPIs? • As a researcher or as a private source: • By cooperating with national authorities to compile and publish CPPIs • By informing the national central bank on ongoing projects • As a central bank: • To inform BIS on any developments: new publications, improved methodology, breakdown • To transmit data to the BIS

20. Thank you!!BIS CPPI statistics:https://www.bis.org/statistics/pp_commercial.htm property.prices@bis.orgrobert.szemere@bis.org