"Housing markets have decelerated somewhat since mid-2014, but significant pressures remain. (...) Persistent upward pressure on house prices partly reflects supply constraints. (...) High house prices result in some households taking on high leverage, posing financial stability risks. (...) Further macroprudential tightening may thus be needed if the reduction in high leverage mortgages does not continue", says the IMF's new report on the United Kingdom.
A separate IMF paper examines how tax reforms could help ease structural supply constraints in the UK’s housing market. "Property taxation in the UK delivers larger revenue as a percent of GDP than any other OECD country. (...) However, a closer look at the UK’s property tax system suggests that some areas could be reformed to reduce constraints on housing supply and thereby reduce risks stemming from high house prices. In particular, deducing council tax discounts [and (...)] reducing reliance on the stamp duty land tax."
After countries remove restrictions on capital flows, inequality often gets worse
In June 1979, shortly after winning a landmark election, Margaret Thatcher eliminated restrictions on “the ability to move money in and out” of the United Kingdom, which some of her supporters regard as “one of her best and most revolutionary acts” (Heath, 2015).
Thatcher’s critics [have] regarded this same liberalization as starting a global trend whose “downside . . . proved to be painful” (Schiffrin, 2016). In their view, while the free mobility of capital across national borders confers many benefits in theory, in practice liberalization has often led to economic volatility and financial crisis. This in turn has adverse consequences for many in the economy, particularly for those who are not well off. Liberalization also affects the relative bargaining power of companies and workers (that is, of capital and labor, respectively, in the jargon of economists) because capital is generally able to move across national boundaries with greater ease than labor. The threat of being able to move production abroad reduces labor’s bargaining power and the share of the income pie that goes to workers.
In studying such distributional effects of capital account liberalization, Davide Furceri and I found that after countries take steps to open their capital account, an increase in inequality in incomes within countries follows (Furceri and Loungani, 2015). The impact is greater when liberalization is followed by a financial crisis and in countries where there is low financial development—that is, where financial institutions are small and access to these institutions is limited. We also find that the share of income going to labor declines in the aftermath of liberalization. Thus, like trade liberalization, capital account liberalization can lead to winners and losers. But while the distributional effects of trade have long been studied by economists, the distributional impacts of opening the capital account are just starting to be analyzed.
Read the rest of this (non-technical) summary of our results here: http://www.imf.org/external/pubs/ft/fandd/2016/03/furceri.htm
Here’s a link to the IMF Working Paper: http://www.imf.org/external/pubs/ft/wp/2015/wp15243.pdf
Earlier versions of this research, based on data for advanced economies, were featured on Krugman’s blog and in VoxEU. These new results extend our results to developing economies as well as lay out possible channels through which capital account liberalization leads to inequality.
“Global house price boom accelerates further, led by Europe, North America, and some parts of Asia Pacific”, according to the Q3 2015 quarterly note from the Global Property Guide. This house price boom is reflected in two measures. First, real house prices rose in 28 out of a sample of 41 countries. Second, there is stronger upward momentum—in 22 countries house prices have risen faster compared to the previous quarter. These results are also in line with the Q3 2015 data reported by Knight Frank. Of the 55 housing markets tracked by Knight Frank, 82 percent recorded positive annual price growth, up from 75 percent. However, FITCH notes that even though the housing and mortgage outlook for the 22 countries remain stable/positive, divergence is increasing.
Looking at global house price developments in more detail, the Bank for International Settlement (BIS) says that real house prices increased by 4.3 percent year-on-year in advanced economies vs. a decline of 1.0 percent in emerging market economies. Within emerging market economies, the BIS notes that “there were significant disparities across countries: while prices continued to rise strongly in Hong Kong SAR, India and Turkey, they kept falling in Brazil, China and Russia.” Going forward, “the EM house price boom will be curbed by slowing income growth and weaker economic prospects”, says Oxford Analytica.
In the Euro area—where house price data coverage is higher compared to other regions—house prices rose by 2.3 percent in the third quarter of 2015 compared with the same quarter of the previous year, according to Eurostat. On the outlook for Europe, FITCH says that “Rising GDP, low rates, recovering credit flows, and improving labour markets will support the bounce-back in the eurozone periphery.” Moreover, according to Urban Land Institute’s Emerging Trends Europe, the five leading cities for investment prospects in 2016 are Berlin at Number 1, followed by Hamburg, Dublin, Madrid and Copenhagen.
Finally, the latest survey from Demographia International Housing Affordability Survey finds that “The most affordable major metropolitan markets in 2015 were in the United States, which had a moderately unaffordable rating of 3.7, followed by Japan, with a Median Multiple of 3.9. Major metropolitan markets were rated "seriously unaffordable," in Canada (4.2), Ireland (4.5), the United Kingdom (4.6) and Singapore (5.0). The major markets of Australia (6.4), New Zealand (9.7) and Hong Kong (19.0) were severely unaffordable.”
A new IMF paper by Sami Ben Naceur and RuiXin Zhang "(...) provides evidence on the link between financial development and income distribution. Several dimensions of financial development are considered: financial access, efficiency, stability, and liberalization. Each aspect is represented by two indicators: one related to financial institutions, and the other to financial markets. Using a sample of 143 countries from 1961 to 2011, the paper finds that four of the five dimensions of financial development can significantly reduce income inequality and poverty, except financial liberalization, which tends to exacerbate them. Also, banking sector development tends to provide a more significant impact on changing income distribution than stock market development. Together, these findings are consistent with the view that macroeconomic stability and reforms that strengthen creditor rights, contract enforcement, and financial institution regulation are needed to ensure that financial development and liberalization fully support the reduction of poverty and income equality."
Here are some of my previous posts on capital account liberalization and inequality.
My presentation today at CIGI tries to provide a framework for the IMF's various recent policy forays and some of the key changes in IMF advice.
"House price growth was strong over recent years but has moderated recently", says IMF's report on Austria.
"The turnaround in house prices presents an opportunity to implement policies to better insulate Dutch households and the overall economy from the effect of future house price declines and remove some of the incentives for excessive leverage—thereby reducing the likelihood and intensity of boom-bust cycles", according to the IMF's report on the Netherlands.
Moreover, the report notes that "House prices have started to recover. However, they remain well below peak levels. Prices have risen by more than 5 percent since the 2013 trough, but they are still 17 percent below their 2008 peak in 2015:Q3. More than a quarter of Dutch households have mortgage debt in excess of the house value, primarily among younger households. The recovery in housing prices is uneven. The market is buoyant in Amsterdam, where house prices are less than 4 percent below the 2008 peak, and to a lesser extent in other major cities. However, house price increases are more subdued in outlying areas."
"House price inflation in Auckland has remained high. House prices in Auckland (where about one-third of the population lives) have continued their strong upward trend, rising by 22.5 percent (y/y) in December 2015, and the housing inventory available for sale remains low. Moreover, prices in neighboring areas are beginning to accelerate as buyers are priced out of the Auckland market. Supply shortages are a fundamental driver of house price inflation, exacerbated by high net immigration. On the demand side, macroprudential measures introduced in 2013 have led to a temporary slowdown in house price inflation. A package of additional macroprudential regulations and tax measures aimed at containing risks emanating from the Auckland housing market was announced in May 2015, but having become fully effective only in November, its effectiveness to cool rapid house price growth is yet to be seen", says IMF's new report on New Zealand.
A separate IMF paper "analyzes long-run trends in house prices and household debt in New Zealand. The key findings are that economic fundamentals such as financial liberalization, lower interest rates, demographics and supply constraints are important factors in the large run up in house prices. Although higher house price and household debt can largely be explained, it still has implications for financial stability."
"There is little evidence of a housing bubble, as the price increase over the past 10 years appears modest relative to nominal GDP growth", according to IMF's report on Morocco. The report also notes that "Several prudential tools have been used to manage systemic risk. A code of ethics was adopted by banks in 2008 to tighten lending standards for real estate. In addition, an increased tax on nonprimary housing was used to discourage speculative house purchases in 2006–08. Credit growth decreased from 24.4 percent in 2008 to 10.4 percent in 2009 (...)."
The 2016 Stekler Award for Courage in Forecasting goes to Michael ("Mish") Shedlock. At the start of 2015, the blogger popularly known as "Mish" had predicted recessions in Canada and the United States during 2015. While these events did not come to pass, enough anxiety was generated about the health of these economies over the course of the year that Mish deserves some credit for anticipating a degree of weakness that was not being widely talked about at the start of last year.
The Stekler Award is named after the famous forecasting expert and academic Herman Stekler who believes that recessions should be forecast "early and often." In practice, recessions are almost never forecast in advance. The Economist recently re-discovered this long-standing finding and highlighted the poor record of the IMF in forecasting recessions. The record of other public institutions or the private sector is just as poor. For instance, see the charts below on forecasts made by the IMF, OECD and the private sector (labeled ‘CF’ in the charts) over the course of 2009—each point shows the forecast for a particular country. The forecasts are virtually identical. And the forecasts for recessions (negative growth) were not made in advance by any of the sources.
The race is on for the 2017 award. Suggestions are welcome and can be sent to ploungani@gmail.com. The Stekler Award recognizes forecasts that depart significantly from the consensus view. Predictions need not be restricted to forecasts of recessions but they must be specific (so "oil prices will rebound someday" doesn't cut it) and well reasoned (so no "we have been on the path to doom which is bound to come one day"-type of forecasts).
We mined a recent article in Politico to see if we could get some front runners for the 2017 award. There were a range of predictions, some quite clever (Dean Baker predicted that during 2016, unlike 2015, oil prices would not fall another $60 a barrel), some specific (Ann Harrison predicts that "India will replace China as the leading destination for foreign investment" in 2016), most quite gloomy. On the U.S. economy in 2016, most experts surveyed stuck to the center, though Robert Reich said: "I expect the U.S. economy to sputter in 2016"; if he'd been a little more specific he 'coulda been a contender'.
