Global Housing Watch Newsletter

• The Newsletter has an interview with Lars Svensson on when and how to deal with housing booms. Svensson lays out the policy options with his characteristic clarity. Read the full interview and the newsletter here.

• The Quarterly Update shows why averages can sometimes be misleading—the Global House Price Index shown on the first page continues a slow and boring uptick, but turn the page and you see it’s a story of two very different halves. Read the full note here. 

Inequality in China

WSJ's Ian Talley reports on an IMF working paper. According to Talley: " A widening gap between China's rich and poor makes "one of the most unequal countries in the world," according to a new working paper published by the International Monetary Fund.

Authors Serhan Cevik and Carolina Correa-Caro write that the rich are gleaning most of the fruits of the transition from a system of centrally-planned socialism to a market-oriented economy.

Although per-capita income has grown and the number of people living on less than a $1.25 a day has plummeted, income inequality has skyrocketed, the economists said. The top quintile of earners now pull in nearly half of total income while the poorest quintile of earners account for under 5%.

"China's widening income inequality is largely a reflection of faster income growth among the rich, rather than stagnant living standards among the poor," the two economists said.

With an estimated 2.4 million millionaire households, China now has more than any country but the U.S.

China's credit-fueled investment and export-led development model are likely the primary drivers of the sharp increase in income inequality over the last three decades, they said.

Beijing's economic strategy has aimed at higher growth rates. Although that effort may have lifted many Chinese out of poverty, the two economists said there's mounting evidence that the widening income gap could weigh on future growth. That, they said, could come "with significant social consequences, especially in a country like China aiming to move beyond the 'middle income' status."

To relieve those potential pressures, the two economists recommend ramping up taxes to pay for a redistribution of income: raising taxes on higher earners, broadening the personal tax and imposing a value-added tax on services. At the same time, Beijing could lower labor taxes that hit low- and middle-income earners, they said."

House prices in Ireland

The latest IMF report for Ireland says: "Property markets are bouncing back rapidly. Commercial real estate values are up 30.7 percent y/y in 2014, though they still remain about 30 percent below pre-boom levels. Values were bolstered by record transaction volumes with over one-third reflecting foreign investment inflows. At the same time, house prices rose 16.3 percent y/y, as fast as the increases during the boom period, though they are still 38 percent below peak.”

Housing Wealth and Inequality

Matt Rognlie concludes: “Housing has a pivotal role in the modern story of income distribution. Since housing has relatively broad ownership, it does not conform to the traditional story of labor versus capital, nor can its growth be easily explained with many of the stories commonly proposed for the income split elsewhere in the economy—the bargaining power of labor, the growing role of technology, and so on.

Beyond housing, the results in this paper suggest that concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income. Although the net capital share has at times seen dramatic shifts both up and down, away from housing its long-term movement has been quite small, and there is not strong reason to suspect that this pattern will change going forward.”

House Prices in Indonesia

"Higher borrowing costs and macro prudential measures have helped moderate growth in property prices," notes the IMF's latest annual economic report on Indonesia.

House Prices in Iceland

A new IMF paper on asset price bubbles says that "One of the potential costs of prolonged capital controls is the formation of asset price bubbles. House prices in Iceland have been rising rapidly in the recent period, prompting concerns about possible overvaluation. Based on a cross-country comparison, time-series analysis, and correlation analysis, house prices in Iceland do not stand out as particularly misaligned. To formally test whether the housing market is overvalued, we employ the Igan and Loungani (2012) model based on housing affordability, per capita income, population, stock prices, credit, and interest rates. We find that there are currently no misalignments between house prices and the fundamentals, which is consistent with the recent analysis conducted by the CBI. However, housing supply-side constraints remain significant, with new starts well below the historic norm. These, together with the ongoing recovery in mortgage lending, the wealth and income effects of household debt relief and Pillar III withdrawals to fund debt relief (and, until discontinued in 2015 budget, for general consumption), increasing demand for vacation properties, and potentially large wage hikes in the near-term, may lead to an overshooting of house prices. Policies that could be explored (while keeping an eye on broader macroeconomic considerations) to help minimize the risks of asset price bubbles in the housing sector include steps to: (i) support measured increases in housing supply; (ii) maintain non-inflationary growth in wages; (iii) prevent excessive leveraging; and (iv) increase household savings."

House Prices in Belgium

A new IMF paper "(...) argues that current house prices are closer to their equilibrium than simple historical ratios would suggest and that given the moderate overvaluation, a gradual and limited adjustment seems a plausible scenario. Strong household balance sheets, a seemingly well-managed mortgage market and various institutional characteristics reduce the risk of an abrupt correction. Given that historical house price changes have had moderate macro-economic effects – with the exception of residential investment – the repercussions of a gradual decline seem manageable."

Moreover, the paper says that "there is a continued need for vigilance and policy coordination. Recent changes in macro-prudential and fiscal policy seem appropriate to make the housing market safer and reduce untargeted fiscal expenditures. To assure that the price adjustment remains orderly and does not lead to overshooting, future policy changes should be gradual and coordinated among different institutions. A well communicated housing strategy could help to avoid price mis-alignments in the future."

House Prices in Malaysia

"Although there are signs of cooling in the housing market and personal lending growth has been curtailed, financial vulnerabilities remain due to high household debt and elevated house prices," according to the new IMF report on Malaysia. Specifically, it says "House prices have risen steadily (...) outpacing incomes and rents. Although population growth is strong this cannot fully explain the increase in house prices compared with other countries. However, there are tentative signs of cooling in the housing market in Kuala Lumpur. Residential supply is increasing (…) and is particularly strong in Johor and has recently recovered in KL."

House Prices in Malta

"After a period of downward correction in 2008-09, Malta’s housing market seems to have stabilized," notes the latest IMF report on Malta. However, the report says that "One of the main risks facing core domestic banks relates to their exposure to the real estate sector. Around two thirds of loans extended by banks are secured with real estate collateral, and mortgages are one of the few segments of bank loans which have been increasing recently (unlike loans to NFCs). It is important to continue mitigating the risk of exposure concentration to the real estate sector by the application of a cautious collateral valuation and conservative loan-to-value ratios. There is also room to enhance the loan foreclosure process by advancing judicial reform. This risk can be exacerbated by the weak performance of the EU countries, generating negative spill-over effects on the Maltese economy and its financial sector. "