House Prices in Georgia

"Despite an overall positive outlook, there are several key macroeconomic vulnerabilities that would impact the financial sector: (...) Sudden decline in asset prices. As more than half of domestic private credit is backed by real estate, continued increases in real estate prices toward the pre-collapse level in 2008 could become a source of vulnerability," says a new IMF report on Georgia.

House Prices in Denmark

"Danish house prices bottomed out and have recently started to pick up gradually. From the 2007 peak to the 2012 bottom, real house price dropped by about 30 percent. Real house prices started to rise in 2013 and grew 2.6 percent (y/y) in the second quarter of 2014 even though the pace of house price recovery varies across regions and types of housing (e.g., a stronger recovery in the prices of owner occupied flats in the Copenhagen area). Staff estimates based on three different metrics (price-to income ratio, price-to-rent ratio, and model based) suggest that house prices are currently close to fundamentals," says the latest IMF report on Denmark. 

Moreover, the report says that "Danish household debt continues to be the highest among the OECD countries, in large part to finance housing wealth. Household debt has been always relatively high in Denmark, but it grew rapidly during the housing boom, facilitated by the introduction of deferred amortization loans in 2003, reaching about 300 percent of disposable income. On the other side of the balance sheet, household assets are also large with positive net worth. However, these assets consist mostly of illiquid mandatory pension accounts and housing, leaving households with limited liquid buffers and making them more vulnerable to interest rate shocks. The need to rebuild balance sheets has depressed private consumption, weighing on the recovery in recent years." Continue reading here. Also, see a special note on the mortgage finance system here.

Macro-Prudential Policies in Kuwait

"The CBK has been proactive in introducing macroprudential regulations in line with international practices to mitigate potential financial stability risks. The main source of vulnerability to the banking system comes from credit concentration to the corporate sector and real estate, given the structure of Kuwait’s domestic market, which the central bank regulates through concentration limits. The main sectoral exposures of banks are in real estate, equity and household lending, the latter two regulated through ceilings on equity investments and debt-to-income limits, respectively. Having tracked increased activity in real estate, the central bank introduced a loan-to-value ratio for residential real estate for investment purposes of individuals in November 2013, to limit financial stability risks, which staff welcomes. Staff has also observed that activity has been recently increasing in investment properties and commercial real estate segments of the real estate market, which the central bank is closely watching and ready to use macroprudential tools to limit potential stability risks to the banking system arising from this sector," according to latest IMF report on Kuwait.

Macro-Prudential Policies in Turkey

The latest IMF's report on Turkey lists the recent macro-prudential policies implemented. To see the list click here.

House Prices in Netherlands

"The global recession and regulatory tightening have helped deflate the housing prices with the losses falling disproportionately on the younger generations. House prices have declined by 27 percent in real terms since their peak in late 2008. The deflation of Dutch housing prices has caused massive losses of wealth which are unevenly distributed across generations. Younger house buyers are burdened by the lion’s share of losses in housing wealth. In addition to greater housing losses, younger households have not have sufficient time to accumulate pension claims and other (financial) assets households under the age of 35 have negligible levels of net worth," according to a new IMF report on Netherlands.

Read here the full note on House Prices, Consumption, and the Household Debt Overhang in the Netherlands. Also, read here the note on Building a More Resilient and Efficient Market for Housing and Finance in the Netherlands.

IIMB-IMF Conference on Housing Markets, Financial Stability and Growth

Here are links to papers and presentations for the conference. A link to the speech by Ratna Sahay will be posted later. Scroll down for links to papers and presentations on housing finance (by Frank Warnock, Veronica Warnock, Simon Walley); on urbanization (Somik Lall, Tony Venables); house prices in emerging markets (Hites Ahir, Mick Silver and Alessandro Rebucci); and the housing market in India (H. A. C. Prasad, Lalit Kumar, and Charan Singh). Also, see a blog by Min Zhu on Managing House Price Booms in Emerging Markets, IMF's Deputy Managing Director. 

Inaugural Address
R V Verma, Former Chairman, NHB


Session 1: Macroprudential Policies

Chair: Arvind Virmani, Former ED, IMF

Ratna Sahay, IMF
How to Manage Housing Booms: What Does the Cross-Country Evidence Show? (PPT)

Jihad Dagher, IMF
Housing Finance and Real Estate Booms: A Cross-Country Perspective

Discussant: Hans Genberg, Bank Negara Malaysia and SEACEN (PPT)


Session 2: Frontiers of Housing Research

Chair: Hans Genberg, Bank Negara Malaysia and SEACEN

Inho Song, Korea Development Institute
Housing as a Unique Asset

Discussant: Mico Loretan, Swiss National Bank (PPT)

Chetan Subramanian, IIM-Bangalore
Asset Price Bubbles and Endogenous Growth

Discussant: Romar Correa, University of Mumbai


Session 3: Housing Finance

Chair: K Kanagasabapathy, Former Adviser-in-charge, MPD, RBI

Veronica Warnock, University of Virginia
Developing Housing Finance Systems: A Global Perspective 

Simon Walley, World Bank
Housing the World: Leveraging Private Sector Resources for the Public Good (PPT)

Frank Warnock, University of Virginia
Housing Finance in Latin America: What is Holding it Back? 

Discussants: R. S. Deshpande, Former Director, ISEC
                     Devi Prasad, Former Director, FPI

Session 4: Urbanization

Chair: R. S. Deshpande, Former Director, ISEC

Somik Lall, World Bank
Urbanization and Housing Investment (PPT)

Discussant: Frank Warnock, University of Virginia

Tony Venables, Oxford
Housing in African Cities: Why it Matters and What is Going Wrong (PPT)

Discussant: Ashima Goyal, IGIDR, Mumbai (PPT)

Session 5: Understanding House Prices

Chair: Ashima Goyal, IGIDR, Mumbai

Hites Ahir, IMF
House Prices in Emerging Markets (PPT)

Mick Silver, IMF
Real Estate Price Measurement: Availability and Importance (PPT)

Discussant: Manoranjan Sharma, GM, Canara Bank

Alessandro Rebucci, Johns Hopkins University
Capital Flows, House Prices and the Macroeconomy (PPT)

Discussant: Mick Silver, IMF (PPT)

Session 6: Housing Markets and Monetary Policy in India

Chair: Alok Sheel, Secretary, Government of India

Presenter: H. A. C. Prasad, MoF, Gol; Lalit Kumar, National Housing Bank and Charan Singh, IIM-Bangalore
Housing Market in India (PPT)

Roundtable: Senior management from State Bank of India, ICICI, State Bank of Mysore and Canara Bank

Valedictory Address

G. S. Sandhu, Former Secretary, Financial Services, MoF, GoI

Does Growth Lower Unemployment? (Was Krugman Right Yet Again)?

 On July 9, 2011 when U.S. unemployment was at record highs, Paul Krugman wrote: “Why is unemployment remaining high? Because growth is weak — period, full stop, end of story.” Krugman went on to appeal to an old relationship known as Okun’s Law: “Historically, low or negative growth has meant rising unemployment, fast growth falling unemployment (Okun’s Law).” 

How well has Okun’s Law held up in the 3 ½ years since Krugman wrote? The evidence for the period 1947 to the present is shown below. It is evident that, for the U.S., Okun’s Law has held up quite well, as I have noted before. 

In a recent presentation at Oberlin College, I also looked at how well Okun’s Law holds across the world. If you don’t want to flip through the (fascinating) 100-slide presentation, I did a short summary this week for the IMF’s blog.

House Prices in Cyprus

"The [housing market] boom, which took place during 2004–08, was among the largest in the euro-area, and was driven by FDI and rapid credit growth. The bust was triggered by a decline in FDI following the onset of the global crisis in 2008 and was exacerbated by falling domestic output and employment starting with 2009. Despite their sizeable decline to date, housing prices may have further room to fall before reaching equilibrium. House prices have already declined by 26 percent since their peak in 2008. However, according to common house price ratios, the overvaluation gap is around 0–20 percent, with an average across methodologies of 7 percent. According to a housing market model, the valuation gap is around 14 percent," says a new IMF study on the Housing Market in Cyprus: From Boom to Bust. Read the complete study here. 

House Prices in Singapore

"Singapore’s housing market is cooling. Both private and public house price growth turned negative in late-2013, and declined by 1.3 percent and 1.6 percent (q/q), respectively, in the first quarter of 2014. Indicators on the quantity side also indicate a softening of the market: the number of housing transactions has been decreasing; house supply conditions, which had tightened in the mid-2000s due to rising population, have been easing; and vacancy rates are rising. Going forward, further downward pressure on house price is expected with a large supply of new housing set to come on the market in the coming years," according to the IMF's latest economic report on Singapore.

Seven Questions on the Global Housing Markets

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The housing sector satisfies an essential need. Housing is an important component of investment and in many countries housing makes up the largest component of wealth. At the same time, housing booms and busts have often been detrimental to financial stability and the real economy. This article describes the state of global housing markets—including the role that foreign investors are playing—and policy responses to manage housing booms.

Question 1. What is the state of global housing markets today?

After sharp declines during the Great Recession, the IMF’s Global House Price Index has been inching up over the past two years (Figure 1). During the past year, house prices increased in about half the advanced economies included in this index and about two-thirds of the emerging economies.

In a number of countries—Canada, many countries in the Asia-Pacific region, and many Scandinavian countries—the price of houses have increased steadily after a brief correction during the Great Recession. For many OECD countries, house price-to-income and house price-to-rent ratios remain above historical averages—this is true for example in Australia, Belgium, Canada, Norway, and Sweden. While this provides a broad indication of possible housing market valuations, one should be wary about assessing overvaluation from this evidence alone. Judgments about housing valuation require supplementary information (e.g., credit growth, household indebtedness, lender characteristics, and the method of financing) as well as knowledge about within-country developments (e.g., in some cases the house price increases may be concentrated in particular cities or regions) and institutions.

For instance, Belgium stands out for its high ratios of house prices to rents and incomes. But, on the basis of a more detailed analysis of the supplementary factors, an IMF staff report concluded that “risks of a sharp correction of real estate prices appear contained.” Among other countries, IMF assessments point to modest overvaluations in Canada, Israel, Norway, and Sweden. In many cases, the housing price booms are restricted to particular cities (as in Australia and Germany, for example) or reflect supply constraints (as in New Zealand).

Question 2. How important are foreign investors in global housing markets?

Countries vary in the degree to which they permit foreign investment in their housing markets. According to a survey by the Association of Foreign Investors in Real Estate, the countries with the “most stable and secure” environments for real estate investments for foreign investors are the following: United States, Canada, Germany, Australia, United Kingdom, Sweden, Denmark, Switzerland, France, Japan, and Austria.

For the United States, the dollar level of international sales is estimated at about 7 percent of the total existing homes sales market of $1.2 trillion. International buyers from five countries—Canada, China, Mexico, India, and the United Kingdom—accounted for half of these transactions. In Australia, foreign residential investment has remained at most around 5–10 percent of the value of dwelling turnover and is concentrated in new, high-priced dwellings in inner-city areas of Sydney and Melbourne. For the United States, there is also survey data on the type of financing (cash vs. mortgage financing) preferred by foreign investors (Figure 2). Buyers from Canada and China rely largely on cash financing, whereas buyers from India use mortgage financing.

Question 3. Is there evidence that foreign investors are boosting house prices?

Industry sources and media discussion often ascribe the strength in housing markets in some countries to the emergence of a global investor class that pushes up prices in particular cities, particularly in high-end segments; over time, this is said to impart a boost to prices in other cities as well.

However, a casual look at the performance of luxury residential markets in a number of global cities does not substantiate this view. Patterns of house price developments in these markets during the past five years are quite varied: an upward trend (Beijing, Shanghai); an upward trend after a correction during the Great Recession (London, Hong Kong SAR, Dubai); flat (Singapore, Tokyo); a downward trend (a steady one in Moscow since 2008; more recent in Paris and Geneva; Sydney since 2008 with a recent uptick). The range of correlation among house price growth in these markets is quite wide, from values of -0.7 and -0.8 at one end to over 0.9 at the other. The highest positive correlations are among the cities in China, whereas the largest negative correlations are with Singapore and Geneva.

For the United States, the National Association of Realtors (NAR) tracks the cities that have been of major interest to foreign investors over the past year as revealed through searches on realtor.com. House price growth over the past year in these cities has been higher than in the other cities that are part of the Case-Shiller house price index (14 percent increase compared with 8 percent). In Australia, there is some indication of a price impact from foreign investors, particularly where there are rigidities in housing supply. But the price impact has not been felt in the parts of the market where Australia’s first home buyers are typically concentrated.

In short, there is little evidence thus far of foreign investors having more than a local impact on house prices.

Question 4. What impact do housing markets have on economic and financial stability?

As noted by Zhu (2014) food, clothing, and shelter are traditionally thought of as basic needs; therefore, the housing sector satisfies an essential need. Housing is an important component of investment and in many countries housing makes up the largest component of wealth. The majority of households tend to hold wealth in the form of their homes rather than in financial assets. In France, for example, less than a quarter of households own stocks, but nearly 60 percent are homeowners. Housing also plays other key roles; for instance, mortgage markets are important in the transmission of monetary policy. Adequate housing can also facilitate labor mobility within an economy and help economies adjust to adverse shocks. Hence, a well-functioning housing sector is critical to the overall health of the economy.

At the same time, housing booms and busts have quite often been detrimental to both financial stability and the real economy. Many major episodes of banking distress have been associated with boom-bust cycles in property prices. Of the nearly fifty systemic banking crises in recent decades, more than two thirds were preceded by boom-bust patterns in housing prices. Housing price booms can be particularly toxic when there is a coincidence between the housing boom and the rapid increase in leverage and exposure of households and financial intermediaries. During the global financial crisis, nearly all the countries with “twin booms” in real estate and credit markets—21 out of 23 countries—ended up suffering from either a financial crisis or a severe drop in GDP growth relative to the country’s pre-crisis performance. In contrast, of the seven countries that experienced a real estate boom but not a credit boom, only two went through a systemic crisis and these countries, on average, had relatively mild recessions. Even when housing busts do not have a large financial stability impact, they can affect the real economy. Recessions in OECD countries are more likely given a house-price bust. Such recessions also tend to be much deeper and generate more unemployment than normal recessions.

In sum, there is abundant evidence that housing cycles can be a threat to financial and macroeconomic stability. The cost of resolving housing crises can be very high—in the case of Ireland, for instance, government bailouts of banks from the housing collapse amounted to 40 percent of the country’s GDP. Hence it is crucial to keep an eye on current housing market developments to keep them from going through another boom-bust cycle.

Question 5. What policies can be used to manage housing booms?

Regulation of the housing sector involves a complex set of policies. The noted economist Avinash Dixit suggested we use the acronyms MiP, MaP, MoP to remind ourselves of the set of policies. MiP stands for microprudential policies, which aim to ensure the resilience of individual financial institutions. Such policies are necessary for a sound financial system but may not be sufficient. Sometimes, actions suitable at the level of individual institutions can destabilize the system as a whole. Hence we need not just MiP but also MaP, that is, macroprudential policies aimed at increasing the resilience of the system as a whole. Along with micro and macroprudential policies, we need MoP—monetary policy. Using policy interest rates is usually considered a blunt tool for containing house price booms. But as noted earlier, housing booms have often coincided with a generalized private credit boom. This suggests that monetary policy could be an important tool in many cases in support of macroprudential policies. However, at the moment, policy interest rates in many countries have to remain low to support economic recovery.

Question 6. What are the main macroprudential tools to manage housing booms?

The main macroprudential tools that have been used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-service-to-income (DSTI) ratios and sectoral capital requirements (Figure 3). Limits on LTV ratios cap the size of a mortgage loan relative to the value of a property, in essence imposing a minimum down payment. Limits on DSTI ratios restrict the size of a mortgage loan to a fixed multiple of household income. The hope is to thereby contain unaffordable increases in household debt.

Such limits have long been in use in some economies. For example, Hong Kong SAR has operated an LTV cap since the early 1990s and introduced a DSTI cap in 1994. In Korea, LTV limits were introduced in 2002 and DSTI limits in 2005. During and after the global financial crisis, more than twenty advanced and emerging economies all over the globe have followed the example of Hong Kong SAR and Korea.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies such as Ireland and Norway, capital adequacy risk weights were increased on mortgage loans with high LTV ratios. Sectoral capital requirements have also been used in a number of emerging markets such as Estonia, Peru, and Thailand.

Question 7. What do we know about the effectiveness of these macroprudential policies?

Up to now, the evidence suggests that limits on LTV and DSTI rations are somewhat effective in cooling off both house prices and credit growth in the short run. They are able to break the financial accelerator mechanism that otherwise leads to a positive two-way feedback between credit booms and housing booms. But more fine tuning of these measures is needed. Macroprudential measures need to take into account the ability of market participants to circumvent some of the limits on leverage. In some countries, such as in Canada, LTV limits usefully distinguish between owner-occupied versus investor mortgages.

With regard to sectoral capital requirements, evidence suggests that while this tool increases resilience from additional buffers, its ability to curb credit growth is mixed. Some IMF research suggests that higher capital requirements on particular groups of mortgage loans have some success in curbing house-price growth in countries like Bulgaria, Croatia, Estonia, and Ukraine. There are a number of reasons why higher capital requirements may be less effective in containing credit growth. First, when banks hold capital well above the regulatory minimum, lenders may not need to make any change in response to increases in risk weights. This often happens during housing booms when policymakers hope the tool will be most effective. Second, when lenders compete intensely for market share, they may internalize the costs of higher capital requirements rather than impose higher lending rates.

Macroprudential tools may also not be effective to target housing booms that are driven by the shortage of housing or by increased housing demand from foreign cash inflows that bypass domestic credit intermediation—as noted earlier, some foreign buyers use cash rather than mortgages to finance their purchases. In such cases, other tools are needed. For instance, stamp duty has been imposed to cool down rising house prices in Hong Kong SAR and Singapore. Evidence shows that this fiscal tool did reduce demand from foreigners who were outside of the LTV and DSTI regulatory perimeters. In other instances, high house prices could reflect supply bottlenecks, and hence the effectiveness of demand-focused instruments may be limited. In such cases, the mismatches should be fundamentally addressed by measures to increase the supply of housing.

Global Housing Watch

Today, I and Alessandro Rebucci made a presentation on global housing markets at Fannie Mae. See the presentation here.

Is Unemployment Inevitable?

My answer: “No”. For details, see my presentation at the European Trade Union Institute conference.

Global Housing Prices: It’s a Tale of Two Worlds

From the Wall Street Journal by Nick Timiraos:

An index tracking global property prices in 50 countries shows prices haven’t much risen over the past five years, but new research from the International Monetary Fund shows how averages can be misleading.

The IMF divided those countries into two groups. The first group of 33 countries, which includes the U.S. and the United Kingdom, are those where prices are still recovering. Prices in this group ran up strongly before the 2008 financial crisis and dropped sharply after it hit. These countries have also witnessed a generally slower economic rebound.

The second group of 17 countries, which includes Australia, Canada and China, had a smaller pre-crisis housing boom and have seen stronger post-crisis economic growth.

The result shows a very clear tale of two recoveries. Home prices in the 33 “recovering” countries are around 20% below their 2008 levels, while prices in the 17 “rebounded” countries are roughly 25% higher.

(The recovering countries are Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Malta, Mexico, Netherlands, Poland, Portugal, Russia, Slovak Republic, Slovenia, South Africa, Spain, Thailand, United Kingdom, and the U.S.

The rebounded countries are Australia, Austria, Brazil, Canada, China, Colombia, Germany, Hong Kong, Israel, Luxembourg, Malaysia, New Zealand, Norway, Philippines, Singapore, Sweden and Switzerland.)

A smaller subset of these countries shows a similar story for mortgage credit. Credit has expanded far more slowly in the recovering countries than for the rebounded countries.

Those countries with stronger housing markets have enjoyed better economic growth. The gross value added of construction and real residential investment are both 15% higher than in 2008, while those countries with weaker housing markets have seen only a small uptick in the last year.

Of course, policy makers in countries with stronger housing markets may also face greater challenges, given concerns that prices may be rising in an unsustainable way. Earlier this year, the IMF began its “Global Housing Watch” as part of an effort to curb complacency among regulators and policy makers about housing bubbles.

The latest IMF report flags China as a particular cause for concern. “The challenge is to allow for the necessary correction in real estate markets while preventing an excessively sharp slowdown,” write authors Hites Ahir and Prakash Loungani.

Canada and Israel are modestly overvalued, the authors write, while Norway and Sweden are substantially overvalued. While the United Kingdom has seen substantial price gains over the last year, sparking concerns from central bankers, the IMF classifies it in the basket of “recovering” markets because it experienced sharp price declines from 2008 to 2010.

Moving on: Labor mobility in the United States

There is an old quip about a guy who hears on the local news that most accidents happen within five miles of home. “Darn, I’ve got to move,” he says to himself. Moving wouldn’t solve this guy’s problem, but moving on has generally been an important means of responding to bad news about regional prospects. For the United States, the importance of labor mobility as an adjustment mechanism in the face of adverse regional shocks was shown in a classic paper by Blanchard and Katz (1992). Over 20 years later, how have the Blanchard-Katz findings held up?

Mai Dao, Davide Furceri and I have updated and extended the Blanchard-Katz findings in a new paper. What do we find?

1. Labor mobility remains an important adjustment mechanism in the United States. The use of direct migration data and of instrumental variables estimation, however, suggests that the response of mobility is weaker than in the original Blanchard-Katz paper.
2. There are larger mobility responses to regional shocks in recessions than in good times. This seems counter-intuitive: is it really worth moving during a recession from a place with 12 percent unemployment to a place with 7 percent unemployment?. We try to understand why this might be the case and suggest that the answer could lie in cyclical variation in the ability to smooth consumption. Using standard tests, we show that the ability to insure consumption against idiosyncratic risk is pro-cyclical, rising in booms while being almost absent in recessions. Hence it appears that the increased migration during recessions comes out of the desperation of people who have run out of other options.
3. Some suggestive evidence in support of this view comes from micro data: we show that it is mostly the long-term unemployed and labor market entrants who undertake the bulk of increased migration during recessions. The long-term unemployed tend to experience larger and more persistent income losses and labor market entrants have the least savings to tap into and less collateral to obtain loans. Therefore one would also expect these groups to have the lowest ability to smooth consumption over the downturn.

In an earlier version of the paper we also compared labor mobility in Europe and the US; these findings were summarized by Krugman.

What Lies Beneath: A Sub-National Look at Okun’s Law

Saurabh Mishra and I have been estimating Okun’s Law for U.S. states. It seems to hold quite well in most states. Judge for yourself:
http://murmuring-harbor-6048.herokuapp.com/index.html

House Prices in Austria

"Neither the non-financial corporate sector nor the household sector is overleveraged, but housing prices warrant monitoring," according to the IMF's annual economic report on Austria. The reports says that "Housing price increases have been strong in recent years but purchases have been to a large extent cash-financed and the strongest growth has been predominantly limited to Vienna and some tourist hotspots."

House Prices in Switzerland

"Residential real estate prices have been on an upward trend since the late 1990s, and increases have been especially strong for owner occupied apartments. Through end-2013 prices for owner occupied apartments had increased by 77 percent in the last ten years, while prices for single family homes increased by 49 percent during the same period (...). Also in real terms have prices increased significantly. Compared to the CPI, owner occupied prices are at an all time high, almost 5 percent above the previous peak in the early 1990s before the sharp downward adjustment. Single family home prices are still about 14 percent below the peak, but above the peak in the 1970s and high in a historical perspective," according to the IMF's technical note on Switzerland.

More specifically, the note says that "Real estate price increases have been more dramatic in some regions. In particular at Lake Geneva, where prices for owner occupied apartments during the last ten years had increased by 152 percent through the third quarter of 2013 (...). Single family homes prices had increased by 91 percent during the same period. The price increases also started from already high levels."

In terms of valuation measures, the note says that "Comparing residential real estate prices to rents and income shows substantially increased ratios. Compared to rents, prices of owner occupied apartments have increased by about 25 percent in the last 10 years, which is significant (...). The ratio is nevertheless well below the historical high, though above the historical average. For single family home, the price to rent ratio is just above the long-run average. Turning to real estate prices compared to GDP per capita, the picture is fairly similar, and the ratio for owner occupied apartments prices is around 10 percent above the long-run average, while single family homes are a little below."

House Prices in Czech Republic

"(...) while real estate prices are in a modest recovery trend," says the IMF's annual economic report on Czech Republic.

House Prices in Slovak Republic

"Strong household credit growth reflects substantial home refinancing and some equity withdrawals. While borrowing can help support a recovery in domestic demand, competition among banks has made high LTVs more common (e.g., through higher LTV mortgages or topping up regular mortgages with housing loans). Although real estate prices remain subdued and household debt is not high, this practice could lead to overborrowing by consumers. Adoption of a regulation on LTV or debt-to-income ratios could help prevent an excessive build-up of risks for borrowers and banks," according to latest IMF economic report on Slovak Republic.

House Prices in Norway

"House prices in Norway rose strongly in recent years but stabilized in late 2012. Various factors have been contributing to rising house prices, including high income and wage growth, immigrant inflows, and supply constraints. Nevertheless, there are signs of overvaluation with a sustained increase in the price-to-income ratio and a large deviation in the price-to-rent ratio from its historical average. Staff’s updated estimates on house price valuation gaps, based on the three measures of valuation used in the background papers for the 2013 Nordic Regional Report and Norway Article IV report, suggest a slight correction in the degree of overvaluation in 2013, but prices remain above equilibrium by varying degrees according to different estimates," says the IMF's new annual economic report on Norway.

House Prices in Sweden

"A longer-term solution to rising house prices and mortgage levels will require alleviating housing supply constraints. Insufficient housing supply growth is a fundamental factor behind the rise in residential property prices, especially in metropolitan areas, where ongoing urbanization and immigration trends boost demand. This has resulted in higher housing prices, driving up the size of mortgages. While some steps have been taken, containing house price pressures will require a continuing effort to expand the stock of affordable housing and further reforms to zoning, permitting, and the rent-setting process. Public infrastructure investments, coordinated with municipalities, would also make private housing investments more attractive," according to the IMF's latest economic report on Sweden. 

Also, see an overview of the macroprudential policies in Sweden. 

Are You Cut Out To Be A Macroeconomist? A Simple Test

Try this at home. The chart below shows you the relationship between unemployment and output (to be precise, it is the relationship between the change in unemployment and output growth). The chart is automatically updated, starting with the relationship as it appeared in 1948 to 1963, and then adding 10 additional years at a time to bring it all the way to the present. (You can also click on this link to see these charts: Okun’s Law Over Time.) Now here’s the first question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?

Here’s the link to another macroeconomic relationship, this one between unemployment and inflation. Same deal: first you see the relationship over the 1948 to 1963 period and the charts that follow add 10 years at a time. (You can also click on this link to see these charts: Phillips Curve Over Time.) Second question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?

If you are suspecting a trick you are right. To the lay person, it probably seems that the first relationship, known as Okun’s Law, is strong and stable and the second relationship, known as the Phillips Curve, is weak and unstable. But macroeconomists actually worry a lot that Okun’s Law is dead. And—using special goggles known as ‘econometrics’—they are able to see the Phillips Curve where the lay person may just see a cloud.

Robert Gordon, a renowned macroeconomist, for example has proclaimed the demise of Okun’s Law and noted that, in contrast, the Phillips Curve is ‘alive and well’. This is what keeps macroeconomics interesting: things may not be what they seem. (For what it’s worth, I think that Okun’s Law is alive and well and that the Phillips Curve is being kept alive with artificial resuscitation—but then I’m closer to a lay person than to a renowned macroeconomist.)

House Prices in the Philippines

"In Q4:2013, prices of mid- and high-end condominiums in upscale areas of metro Manila (only available price series) rose by 13 percent, y/y, similar to growth rates that prevailed prior to the GFC. However, in real terms, condo prices remain below their peak that prevailed prior to the Asian financial crisis. This likely reflects in part the large supply increase in this market segment in recent years. In fact, according to the official Philippine Housing Industry Plan for 2012‒30, supply of units in the mid­- and high -cost segments of the housing market is adequate, while the low-end of the market is characterized by severe shortages. Despite the recent price increases, residential price-to-rent ratios have remained relatively stable at around 14 percent," says the IMF's latest report on the Philippines. 

House Prices in Lebanon

See the IMF's latest report on Lebanon here.

House Prices in China

The real estate sector "(...) has shown growing signs of imbalances and activity has softened in 2014. The challenge is to allow for the necessary correction while preventing an excessively sharp slowdown. The contribution of real estate and construction to growth has been rising; last year, it accounted directly for 12.8 percent of value added, and about 33 percent if upstream and downstream sectors are included. Residential real estate is marked by substantial regional differentiation. Large cities have enjoyed favorable demand conditions—reflecting both underlying and speculative demand—and prices show signs of overvaluation relative to fundamentals, despite measures aimed at restricting speculative demand. In contrast, many smaller cities have experienced oversupply as local governments promoted large-scale development to boost growth and used land sales to finance local government spending. Supply seems to have outpaced demand in many areas as evidenced by muted price increases and rising inventories. The commercial real estate market appears to be in oversupply in both smaller and bigger cities," according to the latest IMF report on China.

House Prices in the United Kingdom

"(...) house prices are rising rapidly, and over an increasingly wide area. House price inflation is notably high in London, with levels now 32 percent above those before the crisis, reflecting strong foreign demand for premium properties, and demographic pressures (...). Price rises are becoming geographically more widespread, even though transaction volumes are still below historic averages overall," says the latest IMF report on the United Kingdom. 

Also, see a special analysis here (Housing and Business Cycles: Is the UK Different From Other Advanced Economies)

House Prices in the United States

"After a promising recovery in housing activity for most of 2013, the past several months have seen a retreat characterized by weaker housing starts, declining residential investment, and subdued home sales. New mortgage origination has been particularly sluggish as credit availability remains constrained for lower-rated borrowers and mortgage rates have moved up by around 70 basis points from a year ago," says the latest IMF's economic report on the United States.

More specifically, on mortgage availability, the report says that "A tighter regulatory regime for mortgage lending has helped better match the costs of such financing with the underlying risks. However, as a consequence, the recovery in the U.S. housing market has been held back by a continued conservative approach to mortgage lending, particularly to lower-rated borrowers. This has been driven by a range of factors that include persistent anxiety about potential "put-back" risks (...); litigation and reputational risks to lenders; a tighter regulatory environment and supervisory scrutiny; and uncertainty about the future structure of the mortgage industry."

House Prices in Chile

"Real estate remains dynamic. Real mortgage credit expanded by 9 percent (y/y) in April, and house prices, following some deceleration, are rising again though with large regional variation," says the IMF's annual economic report on Chile. 

Moreover, in terms of real estate exposure, the report says that "Mortgage loans represent about one-quarter of banks’ loan portfolio and the share of mortgages with elevated (80 percent or higher) loan-to-value (LTV) ratios has stabilized at a relatively high 60 percent. Prompt implementation of regulation underway linking mortgage credit provisioning to LTV levels would be important, and further action (hard limits on LTVs and debt-to-income ratios) might need to be considered. The mission also encouraged the authorities to address real estate data gaps, in particular for commercial real estate."

House Prices in Germany

"After several years of stagnation, German housing prices have been picking up, especially in large cities. They have increased by 18 percent in nominal terms since the trough of 2009:Q2 (Figure 1). Recent housing price inflation has been stronger in the largest cities, in particular Hamburg and Munich where the appreciation since early 2009 has been greater than 50 percent in the apartments segment. Simple valuation measures such as price-to-disposable-income-per-capita and price-to-rent ratios have remained almost flat, except in a few hot spots where an upward trend is evident (Steininger, 2014). Analysis by the Bundesbank suggests that housing prices in Germany as a whole are currently close to their fundamental value, but that apartment prices in large cities may be overvalued by about 25 percent (Bundesbank, 2014)," according to a new IMF report on Germany. 

Read the report's section on recent housing market developments here and macroprudential policies' section here. 

House Prices in Iceland

House prices are starting to rise in Iceland, according to a new report by the IMF. 

House Prices in Spain

"House prices dropped by a third and the correction continues," says the latest IMF's economic report on Spain.

House Prices in United Arab Emirates

"(...) residential property prices in Dubai have been increasing quickly, though the momentum appears to have slowed in recent months. Some data sources suggest that Dubai’s residential sale prices have already reached their previous peak in nominal terms. The recovery in Abu Dhabi’s residential market has started much later than in Dubai and the price level is still well below its peak, says the IMF's new economic report on United Arab Emirates. 

Moreover, the report says "Price-income and price-rent ratios can provide some guidance on valuation in the real estate market. Dubai’s price-income ratio has been rising back to its 2008 peak, which could indicate a risk of overvaluation. Price-rent ratios also increased in Dubai and Abu Dhabi." For a thorough analysis, see a special chapter on The Real Estate Market and Expo 2020 in the United Arab Emirates: Avoiding Bubbles and Macro-Instability.

House Prices in France

"(...) the gradual correction of real estate prices which is underway--real prices are 9 percent below pre-crisis peak (...)," according to the IMF's new economic report on France.

House Prices in Colombia

"Housing prices have increased substantially in recent years. House prices have nearly doubled in real terms over the last decade and are 20 percent above the peak in 1996, driven mainly by prices in the capital and two other cities. (...) Mortgages have increased more recently but credit risks appear to be largely under control," according to a new IMF report on Colombia. 

House Prices in Poland

From the IMF's latest economic report on Poland:

Era of Benign Neglect of House Price Booms is Over

While the recent recovery in global housing markets is a welcome development, we need to guard against another unsustainable boom. says IMF's Deputy Managing Director Min Zhu in a blog. He also gave the opening remarks at the Bundesbank/German Research Foundation/IMF Conference that took place recently. 

House Prices in New Zealand

"By historical and international comparisons and some measures of affordability New Zealand’s house prices appear elevated (...). This in part reflects a limited housing stock from low housing investment in recent years and geographical constraints preventing a rapid housing supply response. With house price inflation running high, there remains the risk that expectations-driven, self-reinforcing demand dynamics and price overshooting could take hold.
The government’s steps to help alleviate supply bottlenecks, measures to tighten standards for
mortgage lending (...), and an increase in mortgage rates should help ease price pressures. But a sudden price correction—possibly triggered by a shock to household incomes or borrowing costs—could reduce consumer confidence, impact overall economic activity,
and hurt banks’ balance sheets," according to the IMF's new economic report on New Zealand. 

Labor Rewarded

Prakash Loungani profiles Christopher Pissarides, winner of the 2010 Nobel Prize for work on unemployment and labor markets

NOBEL Prize awards for economics sometimes contain a touch of whimsy: they honor people with opposing views—such as the 1974 award to the left-leaning Karl Gunnar Myrdal and the libertarian Friedrich August von Hayek—or reach back to recognize academic achievements long forgotten. The 2010 award was given to a like-minded group: it recognized Peter Diamond, Dale Mortensen, and Christopher Pissarides, whose research coalesced in the 1990s into a workhorse model of unemployment and the labor market. And the time was right. In the aftermath of the Great Recession, 200 million people across the globe were unemployed, and getting them back to work was the most urgent economic policy task.

For Pissarides, a Cypriot of Greek descent, understanding unemployment has been his life’s work since the 1970s. It took 20 years of academic toil before the impact of his research started to transform the way economists think about unemployment—and then for its influence to seep through to policy. IMF chief economist Olivier Blanchard, a noted scholar of unemployment himself, says: “Chris persevered. And history has proven him right. There is an important lesson to researchers here. When you think you are right, don’t listen too much to others.”

Today, with everyone listening to him, Pissarides can use the bully pulpit afforded by the Nobel Prize to help address the unemployment crisis in Europe. He has supported some policies of the so-called troika of lenders—the European Commission, European Central Bank, and International Monetary Fund—but has been an outspoken critic of others (see box). He has been particularly active in his home country of Cyprus, where as head of the national economic council—akin to the Council of Economic Advisers in the United States—he advises the president on issues ranging from bank restructuring to the business model for Cyprus in the future. “Cyprus has some 10 TV channels,” says Pissarides, “and they are all chasing me for my views. Sometimes I want to retreat to my university office and lock the door. But I know if I do that, I will regret it. This is the time to help.”

Continue reading here.

Not Your Father's Service Sector

Services are gaining newfound respect as the basis of modern global trade

In 1988, General Motors launched an ad campaign with a memorable jingle: “This is not your father’s Oldsmobile. This is the new generation of Olds.” The car’s image had not kept up with its transformation from a staid cruiser to something far more high-tech and stylish. The service sector could use such an ad campaign: it too needs an image makeover to match its transformation over the past decade. The Oldsmobile didn’t make it, but the service sector is here to stay—it already accounts for 60 percent of global employment.

Prejudice against the service sector runs deep. Some regard it as the useless sibling of other sectors of the economy such as agriculture and manufacturing. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” To this day, as economist Christina Romer lamented in a New York Times op-ed, there is a “feeling that it is better to produce ‘real things’ than services” (Romer, 2012).

Others have treated services not as socially useless but as somewhat challenged. A famous 1967 paper by U.S. economist William Baumol fostered the view that services is a sector resistant to improvements in productivity. He noted that the provision of services—such as restaurant meals, haircuts, and medical checkups—required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income.

This image is no longer a fair representation of the service sector. Service occupations today include a few that even Smith might have considered useful. Trade in services has increased within and across national borders. Many services are now high tech and pay high wages. And increasingly, manufacturing and services, far from being competing siblings, are part of a joint family of value creation. Services are ever more critical to the successful operation of manufacturing, debunking debate over countries’ need to choose between the two sectors.

Continue reading here.