Global House Prices: falling, recovering, or bubbling?

My colleague Hites Ahir, who has worked with me over the years on housing issues, is making this presentation at UDC today. What's the answer to the question posed in this title? See his presentation below to find out.

Judging Jeff Sachs

I wrote a profile of economist Jeff Sachs that paints a positive picture of his achievements, particularly of his early work in Poland. A new book seems to be much more critical of Sachs, particularly of his recent work in Africa, according to this book review.

Distributional Consequences of Fiscal Consolidation

The IMF released a second working paper on the distributional impacts of fiscal consolidation. Like the previous work, this one concludes that “fiscal consolidations are likely to raise inequality through various channels including their effects on unemployment. Spending-based consolidations tend to worsen inequality more significantly, relative to tax-based consolidations.” For more on the IMF’s recent work on fiscal policy, see this presentation at UNICEF.

Global House Price Watch

Full report

1. Index of global house prices keeps inching up …

2. … with house prices rising in 30 countries out of 51 included in the index



3. Among OECD countries, increases and declines are more evenly balanced



4. In most OECD countries house price-to-rent ratios remain above their historical averages …



5. … as do house price-to-income ratios



Here's the full report. 

Okun's Not Broken: Jobs and Growth are Still Linked

I sound like a broken record (young people will not know how a broken record sounds, let alone what a 'record' is) but I gave a talk at the New School for Social Research today on how jobs and growth are linked in many countries across the globe. On a personal note: It was difficult not to 'feel verklempt' giving a talk at New School--Robert's Heilbroner's "The Wordly's Philosophers" is probably why I became an economist.

"Austerity" and Inequality: Engaging UNICEF

In my presentation at UNICEF today I spoke about the impacts of fiscal consolidation (often called "austerity" in the blogosphere) on long-term unemployment, labor's share of income, and inequality. 

Here's a link to the paper.

The announcement

The view from the UNICEF conference room

House Prices in Austria

"The housing market has experienced strong price growth but from low levels. In nominal terms at end-2012, house prices rose 14.9 percent y-o-y in Vienna compared with 11.5 percent y-o-y for Austria overall. In real terms and from a medium-term perspective, the price increase appears more modest: a cumulative 40 percent over 10 years in Vienna and about 5 percent in the rest of Austria. Housing market activity seems to be driven largely by non-resident buyers and domestic investors seeking an alternative to low fixed-income returns, though continued immigration also likely supported demand for housing in urban areas. Mortgage credit has exhibited slow growth, suggesting the prevalence of equity buyers," according to the IMF's annual report on Austria. 

U.S. “Structural” Unemployment: Updated Estimates

Each release of the U.S. payroll employment report leads to a debate on the extent to which unemployment is cyclical vs. structural. I’ve just updated the estimates of U.S. structural unemployment reported in my 2011 IMF Working Paper. (Please note that IMF working papers represent the views of the authors and not the official view of the IMF or of any institution with which my co-authors are affiliated.)

Estimate of Structural Unemployment, 2008:Q1 to 2013:Q2

The bottom line? The estimate of structural unemployment has declined over the past year in line with the decline in the actual unemployment rate. In the figure below, the solid (black) line shows the U.S. unemployment rate declining from nearly 10 percent in 2009:Q4 to about 7 ½ percent today. The dotted (red) line is the estimate of structural unemployment; it too has declined over that time and the latest estimate of structural unemployment is 6.2 percent. There is a lot of concern about U.S. long-term unemployment. In this case too, there has been a decline in the estimate of the structural component of long-term unemployment, but it is more gradual than in the case of total unemployment.

Structural Component of Long-Term Unemployment

Intrigued? This post by Menzie Chinn (Econbrowser) has a nice ‘cheat sheet’ on how these estimates were constructed.

House Prices in the Nordics

"House prices in the Nordic-4 [Denmark, Finland, Norway, and Sweden] rose in tandem from the mid-1990s until the recent peaks in 2007 but diverged afterwards. House prices increased by more than 120 percent on average in the Nordic countries between 1995 and 2007 (see Figure 2.1). Since 2007 peaks, house price co-movements seem to have dissipated. The real house price in Norway increased by more than 10 percent relative to the 2007 peak level, while house prices fell by close to 30 percent in Denmark. In Finland and Sweden, house prices have remained broadly constant around 2007 levels," according to an IMF report on the Nordic Region. 

"The estimates suggest house prices are overvalued in the Nordic-4, but the extent of overvaluation varies (see Figure 2.3). The chart shows both the range and the mean of house price gaps based on the three different measures discussed above [(i) a time-series model; (ii) deviations from a long-run price-to-income ratio; and (iii) deviations from a long-run price-to-rent ratio]. The average estimate of the valuation gap for Norway is just over 40 percent while the estimated valuation gap is less than 10 percent in Denmark. Average estimates for Finland and Sweden suggest that house prices are moderately overvalued, by 12 and 22 percent, respectively."

House Prices in Norway

"House prices continue to rise in Norway. There was only a brief correction at the time of the global financial crisis. Real house prices increased by nearly 30 percent from its lowest level in 2008. Standard affordability indicators are also worsening. Price-to-income and price-to-rent ratios increased by 14 percent and 23 percent, respectively, from their lowest levels in 2008. Several factors have been identified to explain the upward trend of house prices, including robust income growth and high population growth due to immigration (see Box 2.1). While these factors may partly explain recent house price developments, there are also risks associated with a house price reversal, and household would be vulnerable to house price corrections given the high levels of household debt," according to a new report by the IMF. 

House Prices in Sweden

"Swedish house prices are potentially overvalued by more than 15 percent. House prices have more than doubled since the mid-1990s, increasing by about 140 percent in real terms between 1995 and 2007 and remaining broadly stable since then. Current estimates suggest that house prices are overvalued by 15 to 18 percent, accounting for rental regulations," the IMF said in its latest annual report on Sweden. 

A Marxist theory is (sort of) right

From the Economist: 

THE Prebisch-Singer hypothesis (PSH) was a staple of leftist economics during the second half of the 20th century. Raúl Prebisch and Hans Singer, working independently, showed that the “terms of trade” between primary products and manufactured goods tended to decline over time. In other words, producers of crops and raw materials gradually became poorer relative to producers of cars and household appliances. If true, the theory would have important implications for world trade; it would suggest that commodity-focused economies must diversify into other sectors or risk falling ever further behind richer countries.

A new paper* by the International Monetary Fund discusses the PSH. The authors examine 25 commodities, from sugar to silver, with some data going back to 1650. Since 1900, around 50% of the commodities show clear downward relative price slopes. About 25% show a clear upward slope. You will have to forgive the confusing labelling of the graphs, but you get the idea:

These graphs show prices relative to manufactured goods; in dollar terms many commodity prices have trended upward over the past century. So countries that produce high levels of primary products have, over time, done worse than economies which rely on manufactured goods. The authors cautiously conclude that "in the majority of cases the PSH is not rejected".

What can primary producers do about this? In a recent conference at the IMF in Washington, one of the authors, Kaddour Hadri, suggested that commodity-dependent economies should take advantage of short periods of price spikes to invest in alternative industries. But many commodity-dependent economies fail to do this. William Sawyer, of Texas Christian University, argues that South America has failed to take advantage of high commodity prices over the past decade. As a result, their economies are not well-equipped to deal with the current price declines.

But according to Javier Blas, a journalist for the Financial Times who spoke at the IMF conference, commodity producers have been fighting against the Prebisch-Singer hypothesis for the last century. Many have shifted production away from commodities which do relatively badly against manufactured goods. The development of the soybean market, as well as shifts towards farming of chicken and pork, are some examples of this. None of these commodities appears in the IMF paper, so it does not tell a complete story. Still, and oddly enough, the IMF seems to have turned up some evidence support a bit of Marxist economic theory.



*Rabah Arezki, Kaddour Hadri, Prakash Loungani and Yao Rao (2013) 'Testing the Prebisch-Singer Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks' Working Paper No. 13/180