A bird’s eye view of OECD housing markets...Christophe ANDRÉ OECD Economics Department . Outline...
Transcript of A bird’s eye view of OECD housing markets...Christophe ANDRÉ OECD Economics Department . Outline...
A bird’s eye view of OECD housing markets
2012 Financial Markets Conference
Federal Reserve Bank of Atlanta
Atlanta, 9-11 April 2012
Christophe ANDRÉ OECD Economics Department
Outline of the presentation
• Recent developments in OECD housing markets
• Drivers of supply and demand
• Housing and the wider economy
Recent developments in OECD housing markets
Real house prices Indices, 1995 =100
0
50
100
150
200
250
300
350
1970 75 80 85 90 95 2000 05 10
Ireland United Kingdom DenmarkSpain Netherlands Norway
Real house prices (cont.) Indices, 1995 =100
0
50
100
150
200
250
300
1970 75 80 85 90 95 2000 05 10
France Belgium AustraliaNew Zealand Finland Sweden
Real house prices (cont.) Indices, 1995 =100
40
60
80
100
120
140
160
180
200
1970 75 80 85 90 95 2000 05 10
United States Italy JapanGermany Canada KoreaSwitzerland
Real house prices in the US and euro area Indices, 1995 =100
40
60
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05 10
United States Euro area
Real house prices in selected US states and euro area countries
Indices, 1995 =100
0
50
100
150
200
250
300
350
1975 80 85 90 95 2000 05 10
California Arizona
Nevada Florida
Spain France
Ireland
Cross-country coincidence of real house price increases
Number of countries (out of 18) with over 25% increase in real prices over the previous five years
OECD Real house prices and the business cycle
Real residential investment Indices, 1995 =100
0
50
100
150
200
250
300
350
1970 75 80 85 90 95 2000 05 10
Ireland United Kingdom Denmark
Spain Netherlands Norway
Real residential investment (cont.) Indices, 1995 =100
0
50
100
150
200
250
300
350
400
1970 75 80 85 90 95 2000 05 10
France Belgium Australia
New Zealand Finland Sweden
Real residential investment (cont.) Indices, 1995 =100
40
60
80
100
120
140
160
180
200
220
1970 75 80 85 90 95 2000 05 10
United States Italy Japan Germany
Canada Korea Switzerland
Construction in selected US states and euro area countries
Volume indices, 1997=100
80
100
120
140
160
180
200
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Arizona California Florida Spain Ireland
Price-Income and Price-Rent ratios Long-term average = 100
United States United Kingdom
Germany France
60
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05 1060
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05 10
60
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05 10
Price-Income ratio
Price-Rent ratio60
80
100
120
140
160
180
1970 75 80 85 90 95 2000 05 10
Price-Income and Price-Rent ratios (cont.) Long-term average = 100
Australia Spain
Netherlands Denmark
406080
100120140160180200220
1970 75 80 85 90 95 2000 05 10
Price-Income ratio
Price-Rent ratio406080
100120140160180200220
1970 75 80 85 90 95 2000 05 10
406080
100120140160180200220
1970 75 80 85 90 95 2000 05 10406080
100120140160180200220
1970 75 80 85 90 95 2000 05 10
Asset-pricing model Poterba (1984)
P = R / (ia + τ + f – π)
P = House prices
R = Rents
ia = After tax mortgage rate
τ = Property tax rate
f = Recurring holding costs
π = Expected capital gains
Actual and fundamental price-rent ratios Long-term average = 100
United States France
Spain United Kingdom
60
80
100
120
140
160
180
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
Actual
Fundamental - Mortgage rates
Fundamental - Government bond rates
60
80
100
120
140
160
180
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
60
80
100
120
140
160
180
200
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 1160
80
100
120
140
160
180
200
1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
Different scale
Drivers of supply and demand
Drivers of demand
• Household real disposable income
• Interest rates
• Mortgage market sophistication >>>>
• Demographics
• Demand by non-residents
• Price expectations
Drivers of supply
• Profitability : House prices compared to production costs
• Expectations of future house prices
• Physical limitations to increasing supply
• Land-use and building regulations
Real house prices and residential investment Percentage change over the latest cyclical expansion
USA
JPN
DEU
FRAITA
GBRCAN
AUS
DNK
ESP
FIN
IRL
KOR
NLD
NOR
NZL
SWE
CHE
y = 0.77x - 6.90R² = 0.75
-100
-50
0
50
100
150
200
250
300
-100 -50 0 50 100 150 200 250 300 350
Residential investment
Real house prices
Housing and the wider economy
Marginal propensity to consume housing wealth and mortgage market indicators
Source: OECD Economics Department working paper, No 394 (2004).
Residential investment and private consumption - United States
Volume indices, 1991=100
80
100
120
140
160
180
200
220
240
1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
Residential investment
Private consumption
GDP
Residential investment and private consumption – Spain Volume indices, 1991=100
80
100
120
140
160
180
200
220
240
1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
Residential investment
Private consumption
GDP
Residential investment and private consumption – United Kingdom
Volume indices, 1991=100
80
100
120
140
160
180
200
220
240
1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11
Residential investment
Private consumption
GDP
The role of policies
• Loose monetary policy risks fuelling housing booms >>>>
• Regulatory and supervisory failures have often led to housing crises >>>>
• Taxation of housing often encourages homeownership and leads to higher debt levels
Tenure structure across countries Per cent of dwelling stock
Source: Andrews, Caldera Sánchez and Johansson, “Housing Markets and Structural Policies in OECD countries”, OECD Economics Department Working Papers, No. 836.
0
10
20
30
40
50
60
70
80
90
100
Owner Private rental Public rental Co-operative Others
%
Globalisation and housing
• Capital inflows associated with trade imbalances have played an important role in fuelling the boom in some countries
• The “savings glut” has contributed to keeping long-term interest rates low
Households wealth and saving in the United States
Per cent of household disposable income
-2
2
6
10
14
300
400
500
600
700
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Net household wealth (left scale) Saving ratio (right scale)
Households saving, government deficit and current account balance – United States
Per cent of GDP
-15
-10
-5
0
5
10
15
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Households savings Government net lending Current balance
Evolution of real house prices and current account balances
2000-2007
USA
JPNDEU
FRA
ITA
GBR
CAN
AUSDNK
ESP
FIN
IRL
KORNLD
NOR
NZL
SWE
CHE
-40
-20
0
20
40
60
80
100
-10 -5 0 5 10 15Change in current account balances (per cent of GDP)
Percentage change in real house prices
Conclusions • Low interest rates and mortgage market
innovations have been the main drivers of the latest housing expansion, at least initially
• After 2003-04, house prices and construction activity seem to have overshot in many countries
• Global imbalances have kept long-term interest rates low
• Inadequate financial regulation and supervision have allowed unsustainable developments in housing finance
• Tax systems favouring homeownership have tended to increase instability
Thank you !
Mortgage market sophistication and innovations
• Extension of loan terms
• Interest-only loans / Flexible repayment loans
• Increased reliance on adjustable-rates
• Higher loan-to-value ratios
• Housing equity withdrawal
• Subprime loans
• Securitisation
Risky lending in the UK Share of all regulated mortgage sales represented by high-risk
products in 2007
• 49% Non-income verified
• 32% Interest-only
• 28% Loan-to-income ratios of 3.5 or over
• 14% Loan-to-value ratios of 90% or over
• 4% To individuals with impaired credit history
Source: FSA
Loan to value ratios for housing of first time buyers in Ireland
Source: Department of environment, Heritage and Local Government.
Household debt Per cent of disposable income
0
50
100
150
200
250
300
350
400
ITA DEU FRA FIN USA JPN ESP CAN SWE GBR AUS CHE NOR IRL NLD DNK
1995 2000 2009
1995 average
2009 average2000 average
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Policy rates and Taylor rule
Per cent Per centUnited States Euro area
0
1
2
3
4
5
6
7
2000 01 02 03 04 05 06 07 08
Short-term interest rate Taylor rule
0
1
2
3
4
5
6
2000 01 02 03 04 05 06 07 08
Short-term interest rate Taylor rule
Real GDP and consumption during housing downturns
-1
0
1
2
3
4
5
-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
Real GDP
Real household consumption
Quarters after peak
<<<<
Regulatory and supervisory failures
• “Shadow” banking system
• Excessive leverage
• Pro-cyclicality
• Opaque securities and risk management failures
• Conflict of interest in rating agencies
• Poor underwriting standards for mortgages
• Insufficient attention to liquidity
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