1 / 10

Central Banks and Housing Markets: A Discussion on Financial Stability

This insightful discussion delves into the relationship between central banks and housing markets, analyzing the impact of housing price changes on financial crises while exploring causal mechanisms and economic evidence. It highlights the interplay between housing capital gains, credit constraints, and collateral cycles. Additionally, the basics of house prices, real price development, and down payment constraints are explored, emphasizing factors such as land scarcity, urbanization, and monetary policy influence. The discussion concludes with considerations for central banks regarding housing prices and potential strategies to navigate collateral cycles.

truly
Download Presentation

Central Banks and Housing Markets: A Discussion on Financial Stability

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International developments in housing marketsPhilip Davis Discussion by Peter Englund SverigesRiksbank, 12 November 2010

  2. The issue • Should central banks careabout (observe, react to) house prices? • ”Key lesson…. avoidhousing boom bustcycles” • Housingpricechangespredictfinancialcrises, butdotheycausethem? • Panel logitmodelnicelyidentifieshousing as one of four key indicators of a crisis. • Based on 12 crises (systemic and non-systemic) in a 17-year panel of 14 OECD countries. • Housing market mayhavehelpedpredictbutdid not play a major role in the Nordic crisis of the 90s (commercial real estatedid). • The currentcrisiswastriggered by specific features of the US housingfinance system, but US house pricesdid not growextremely fast relative to the rest of the world.

  3. Whatwould the causalmechanism be? • Directeffect on bankingstabilitydepends on nature of housingfinance • Loans with no versus full recourse to borrower assets. • Floatingversusfixedinterest rates • Indirecteffects via aggregatedemand (consumption and investment) • Marginal propensity to consumeout of housingwealthversusfinancialwealth. • MPC of financialwealth ≥ real interest rate • MPC of housingwealth≈ 0? (Housingwealth is not netwealth?) • Econometricevidence • MPC of financialwealth 1-5% (Poterba, JEP 2000) • MPC of housingwealth • In some studies higherthan MPC of financialwealth (US data; Case, Quigley and Shiller, 2005) • In other studies somewhatsmallerbut still positive (European panel data; Slacalek, 2009). • This suggests that housingcapitalgains release credit constraints. • Financial accelerator. Collateral cycles.

  4. Basics about house prices • Real house prices trend upwards • Urbanization • Land scarcity • Land pricesincreasingfraction of house prices: from 32% in 1984 to 50% in 2004 (Davis and Palumbo, JUE 2008). • Housingprices not anchored by productioncosts. • Trend reverting (sluggishquantityadjustment). • Correlatedacrosscountrie. • Think in terms of two markets • The market for housing services sets the price (implicit rent = usercost) as a function of fundamentals (income, demographics..) • The market for housing assets sets the asset price as a PDV of future rents. • Long-run asset pricetieddown by productioncost (and land prices). • Asset priceeffectsfeed back intousercost via capitalgainsexpectations (Poterba, 1984). • Monetary policy and credit market institutions (like LTV limits) primarily work via the asset market (the discount rate).

  5. Real pricedevelopment per year (BIS data) Sincepeak2001-06 New Zealand + 4.4%( 1990-2008) + 12.3% Spain + 2.6% (1991-2008) + 11.4% Denmark + 3.0% (1988-2008) + 9.1 % UK +2.2% (1989-2008) +8.8% Canada +1.1% (1989-2008) +8.5% Australia + 3.4% (1989-2008) + 8.5% USA + 0.9% (1989-2008) + 8.5% Belgium + 6.2% (1990-2008) + 8.4% Ireland + 6.0% (1990-2008) + 7.7% Sweden + 2.5% (1990-2008) + 7.2 % Italy + 0.9% (1989-2008) + 6.3% Finland - 0.7% (1989-2008) + 5.8% Norway + 1.7% (1987-2008) + 5.5 % Netherlands + 4.6% (1989-2008) + 2.5% Switzerland - 1.2% (1989-2008) + 2.2 % Japan - 3.2% (1991-2008) - 4.2%

  6. House prices and downpaymentconstraints • PDV of housing services (R), growingexponentially at rate g and disconted at rate ρ • PDV of costs of buying a house at price P, putting a fractionθdown and borrowing the remainder at the after-tax rate r(1-t) and paying a fractionm of house value for maintenance • Equatingcosts and benefitsyields

  7. Impact of changing LTV • For unconstrainedhouseholdscost of equity ≈ cost of borrowing. R/P independent of LTV. • In general, the cost of equityρincreases with θ, therebyamplifying the impact of a change in LTV. For severelyconstrainedhouseholdsavailableequity puts a cap on demand. • LTV alsoimpacts on tenurechoice, assuming landlords’ capitalcosts to be unaffected. • Duca, Muellbauer and Murphy (2010) estimate US house prices as a function of fundamentals and LTV for first-timehomebuyers and findeconomically and statisticallysignificanteffects.

  8. Conclusions • Theremay be goodreasons for central banks to want to affecthousingprices to avoidcollateralcycles. • For given fundamentals, house prices are determined by • Financial market institutions and regulations • Real after-taxlong-terminterest rates. • Cost of equity. • Can monetary policy control the real interest rate and the cost of equity?

More Related