The sources of house price change: Identifying liquidity shocks to the housing market

1. The sources of house price change: Identifying liquidity shocks to the housing market Michael White Paloma Taltavull de La Paz 20th ERES Conference Vienna, July, 2013 Work in progress

2. Agenda • Introduction: Housing and thechannels of transmission • Definingthechannels • Analysis and Model • Data • Results • Conclusions

3. Introduction • Liquidityincreasewas global since late 90’s • Addressingtowardsgrowingeconomics • Activities in strongexpansion • firstindustrygoods –exports, • second real estate –construction-housing • Increasingactivitythroughfinancialsystemand capital markets • Interbankingflowsdidincrease • Feedingeconomiesthroughbanksystem: liquidityacceleration • Creditmultiplier … financeaccelerator • Housingmarket role?

4. Introduction • Analysisfromfundamentals: • General economicgrowth lead to • Demployment • Dimmigration….. D housingdemand • D non residencial real estate. • Whealthpromotesownership (social policy, habits..) • Creditneeds … households and smallenterprises • Maximunlevel of credits?, • no creditconstrains?

5. Introduction • Credit use ….. Macro economiceffects • creditchannel.. • Creditmultiplier … • Promotinghomeownershipinstead of rent • Income and wealtheffect • Strongerhousingmarkets ---- demand more mortgages ---- more transaction --- stronger HM • Increasingprices?

6. Introduction • Mid 2000’s ECB’sanalysisdeptonthefactthatmostliquiditywentintothehousingmarket (and real estate) • Discover a strongchannelbetweenmonetaryindicators and houseprices • Multiplewaysthroughtransmitmonetary impulses intohouseprices and reverse • … House Price Channel

7. Aim of thepaper • Identifythechannelsformonetarypolicytoaffecthousingprices • Anthe role of housingsupplyelasticities • 3 channels: • Assetinflationchannel • Creditchannel • Transactionchannel • Findevidence in twocountries: Spain and UK, using a regional basis

8. Preview of results

9. Fundamentals • Strong macroeconomics impacts from housing boom • the house price bubble • Construction cycle. 4 effects associated to the stress of housing market: • (1) the aggregate effect on the output from the strong housing construction process in some countries (supply side effect), • Barker, 2004, Glaesser, Gyourko & Saiz, 2008, DiPasquale, 1999, Meen, 2002, Saiz, 2008 • (2) the wealth effect…..increase of general consumption, • (3) the increase on household leverage resulting from the ownership entrance in the market, • (4) the increase on systemic risk of the economies experiencing the housing boom due to the rise in mortgage concessions • (these three are effects from the demand side view). • Case, Quigley and Shiller, 2001, 2005, 2011, Goodman, 2005, Muelbauer, 2008.. Among other

10. Fundamentals • Mortgagecreditallowsownershipdemandtobecomeeffective … demand impulse • It was thought that was exogenously determined through the credit channel (main) and Asset inflation channel • (Mishkin (2007) and Muellbauer (2007)) • Its marginal effect on house price is captured by the interest rates price elasticities. • But there are also other channels influencing house prices and liquidity simultaneously (endogeneity) • Transaction Channel

11. Fundamentals • Macroeconomiceffect of mortgagegenerationisexplainedthroughthecreditchanneltheory (Mishkin, 1995) • Two different transmission way + housing collateral effect (Muelbauer, 2007)

12. Fundamentals • Recentanalysisidentify more precisellythetransmissionchannelswherehousepricescouldplayrelevant role: • Creditchannelisthemostanalysed (Aron et al, 2010, Muelbauer, 2007, Otsuka, 2006, Mishkin, 2007, Lastrapes..) • Collateraleffect of housingwealthisthe base of thelendingchannel (Weber et al, 2011, Setzer et al, 2010) • Global liquidityspilloverexiststoassetpriceinflation (Belke et al, 2008, • And housingamplifyitseffects (Greiber and Setzer, 2007).. Housingpricechannel • Butdependingonhowhousingsupplyreactstothe impulses… supplyelasticity

13. Fundamentals • There are threechannels (Greiber and Setzer, 2007) • 1 Friedman – Money demandchannel (classical) • 2 Assetinflationchannel • 3 Creditchannel

14. Fundamentals 1 Friedman – Money demandchannel (classical) • WealthEffect • Substitutioneffect • Transactioneffect

15. Fundamentals 2 Assetinflationchannel

16. Fundamentals 3Creditorlendingchannel • And, more creditincreaseliquidity • As causalityis in twodirections, thechannelisidentify as anaccelerator (Greiber and Setzer, 2007).

17. Aim of thispaper • Approachthecreditchanneltheorywithsomeempiricalevidence, testing: • Assetinflationchannel • Subjecttosupply responses • Test the causal-channelrelationship • Withelasticitiesbeingcalculated as: • Applytotwocountries and theirregions (R): • Spain and UK

18. Data • National and regional data, quarterly • Pool withregions and time series (1995-2011) • Secundarysources: officialdatabases

19. data

20. Regional data

21. data

23. UK prices

25. Liquidity

26. Empiricalevidence • Assetinflationchannel • Panel techniques • 2 separate pools (UK and Spain) • Pooledleastsquare • UK: 1996-2011, 12 regions, 660 obs • Spain: 1995-2011, 17 regions, 969 obs. • Withelasticities ‘bi’ beingestimated as: • D

27. Empiricalevidence • Elasticities. Thesupplymodel: • ForSpain and UK • Lettheelasticitiestovaryamongregions, so, estimating b1i • Test forbreakingpoints.. Chow test show 2008 (UK) and 2007 (spain) as structuralchangeswithpermanenteffects • Logs, regional (fixed) effects

28. Empiricalevidence

29. DlPrit = a + b1lM3 t-1 + b2inf t + b3 e_supi t+ mt Empiricalevidence. Asset i. channel DlPrit = a + b1lM3 t-1 + b2inf t + b3e_supi+ control+ mt Where • lPris a matrix with logs of house prices by i regions • LM3is m3 monetary aggregate: total liquidity • inf is inglation rate by country, • e_sup is the elasticity of suppy by region i, constant for all period • The subscript ‘i’ refers each region (UK and Spain) and • mis the stochastic disturbance term • Control by fundamentals

30. Discussion • Money supplyinflationresults: • M3 significant in Spain and inflation in UK butnot in Spain (consistent in allestimatedmodels) • Thechannel captures directrelationshipbetweenliquidity and houseprices • Regional elasticities are significant in mostregionsbutnot in others • Significant in lessexpensive and lessvolatileregionsotherthan East of England • Significant in mostSpanishregions

31. Discussion • Money supplyinflationresults: • M3 results • 1% increase in M3 (-1) causes 9,2% reductionontherate of increase of houseprices in Uk and 5,8% in Spain • Theimpactsonpricesfrom M3 changes comes throughregionscapturedbythesignificance of supplyelasticities and regional characteristics (fixedeffects)

32. Allcomments are welcome