Housing Market in Korea

An interesting paper by my IMF colleagues Deniz Igan and Heedon Kang looks at how limits on loan-to-value ratios and debt-to-income ratios affect the housing market in Korea.

Igan and Kang write 

"Prior to the crisis, when it came to dealing with asset price booms, the widely-accepted tenet was one of ‘benign neglect’, namely, to wait for the bust and pick up the pieces (Bernanke and Gertler, 2001). Yet, the crisis and its formidable costs shifted the balance to the opposite camp favoring pre-emptive policy actions that could stop bubbles or, at least, could contain the damage to the financial sector and the broader economy when the bust comes. In other words, many policymakers now think that it is better to act than wait on the sidelines because the cost of inaction may greatly exceed the potential negative side effects of policy intervention. (…) In the quest to better design the policy toolkit to deal with real estate booms and busts, macroprudential tools such as maximum limits on loan-to-value ratios (LTV) and debt-to-income ratios (DTI) are heavily advocated. This has led several countries to recently adopt such limits or measures that would discourage high-LTV/DTI loans."

 Korea is one of a dozen countries that have adopted such limits.

Igan and Kang point out, however, that

"we know little about the impact of these measures that have become popular with many regulators after the crisis. Theoretically, limits on LTV and DTI can kill two birds with one stone: they can curb the feedback loop between mortgage credit availability and house price appreciation, and, by restraining household leverage, they can help reduce the incidence and loss given default of residential mortgage loan delinquencies."

The paper asks two questions

"First, what happens when LTV/DTI limits are adjusted in response to developments perceived to be risky? Second, can we quantify the impact of LTV and DTI limits on housing and mortgage activity?"

What are their conclusions? Igan and Kang find that

"transaction activity drops significantly in the three-month period following the tightening of LTV/DTI regulations. Price appreciation slows down a bit later, in a six-month window rather than the three-month window. Moreover, price dynamics appear to be reined in more after LTV tightening rather than DTI tightening. [The authors provide evidence for what the] channel for the impact of the policy actions may be: expected house price increases in the future become lower after policy intervention and this is more prevalent among older households while plans to purchase of a home are more likely to be postponed by those who already own a property, i.e., potential speculators, but not by those who do not own a property, i.e., potential first-time home buyers. These findings suggest that tighter limits on loan eligibility criteria, especially on LTV, curb expectations and speculative incentives. Policy implications of our analysis are encouraging. In housing markets, expectations are key as they often facilitate the settling in of bubble dynamics. If, as suggested by the evidence presented here, limits on LTV curb expectations and discourage potential speculators, they can be effective tools to tame real estate booms and contain the associated risks."

JEC Report Highlights Critical Role of Unemployment Insurance

A new report from the U.S. Congress Joint Economic Committee (JEC) finds that if federal UI benefits are allowed to expire, over 2 million long‐term unemployed workers stand to lose their benefits in early 2012. That number could grow to 5 million before the end of 2012.

Entitled “The Case for Maintaining Unemployment Insurance: Supporting Workers and Strengthening the Economy,” the report finds that at 3.7 percent, the current long-term unemployment rate is nearly three times higher than it has ever been when Congress let federal benefits expire.

“Unemployment benefits serve as a critical lifeline to workers and their families in the face of a sudden and severe drop in income,” said Senator Bob Casey, Chairman of the JEC. “These benefits help struggling families pay for their necessities such as food, housing, clothing, and utilities—obligations that continue even when a family member loses a job.”

On average these benefits only meet half of basic household expenditures but they kept over 3 million Americans out of poverty in 2010. Research shows that extending federal UI benefits during periods of high unemployment works to pull the economy back from a downward spiral whereby reduced consumer demand leads to further reductions in economic activity, and that in turn leads to more job losses.

“Continuing the current emergency federal UI programs is vital to the economic recovery. A temporary reauthorization would not only give millions of struggling long-term unemployed Americans a lifeline, it would bolster the economic recovery by generating jobs and accelerating economic growth. Washington must put aside partisan bickering and give American families the help they need to stay on their feet,” said Casey.

Report highlights include:

• Over 40 percent of the unemployed have been without a job for at least six months, and over 30 percent have been unemployed for at least one year. Letting emergency federal benefits expire now would be unprecedented and could derail the recovery.

• Even without lengthening the maximum allowable duration of benefits, continuing federal benefits could generate up to 400,000 jobs. The boost to the economy from additional spending on UI benefits is estimated to be as large as $1.90 for each dollar of assistance—the greatest “bang-for-the-buck” among a range of fiscal policies designed to boost gross domestic product (GDP) and create jobs, according to the non-partisan Congressional Budget Office (CBO).

• Claims that extended UI benefits deter unemployed workers from looking for work are unfounded. On the contrary, beneficiaries of federal UI benefits have spent more time searching for work than those who were ineligible for UI benefits. Studies find the impact of additional benefits on the unemployment rate to be small. 

• Any increase in the unemployment rate because of federal UI benefits is most likely because the beneficiaries remain attached to the labor force and continue to search for work, not because they refuse employment or do not search for a job.

GLOBAL HOUSE PRICE MONITOR

Do house prices have more room to fall?

Globally, house prices remain in the doldrums, according to just-released data for 2011:Q3. After a decade of boom, the global house price index peaked in 2007:Q4 and since then has been falling or at best stuck in the basement.

Looking behind the global index, however, reveals the inequality across countries. It’s not quite the 99% vs. the 1%, but more like 50-50: house prices have fallen over the past year in about half the countries and risen in the other half.

More Room to Fall?

Many factors drive house prices (see: Housing Prices: More Room to Fall? and IMF Research Bulletin article: Seven questions about house price cycles) making it difficult to predict their future course. Two indicators that economists use to predict the direction of change in house prices are the ratio of house prices to income and the ratio of house prices to rents. If these two ratios are above their historical averages, economic theory suggests that declines in house prices may still be in the offing.

How do these indicators look with the latest data on house prices? For all but a handful of countries, these ratios remain above, and in many cases well above, their historical averages, signaling that there may be room to fall.

An econometric model of the determinants of house prices, used in the World Economic Outlook (see: House Prices: Corrections and Consequences, and updated here and here ), paints a somewhat different picture. The model explains house price growth based on several short-run momentum factors, such as growth in incomes, asset prices and population, and long-run factors, such as the house price to income ratio. The difference between house prices and those predicted on the basis on these ‘fundamental’ factors gives an indication of whether there is room to fall. The results from this exercise show that in many countries the declines in house prices over the past five years (the ‘actual’) are close to, or even exceed, what was predicted by the model. But for many countries, house prices are still resisting the predictions of the model.

‘This Country is Different’

The indicators presented above are very broad brush. At any time, there are myriad country-specific factors that influence house prices. IMF staff reports for countries often delve into these factors in much detail. Readers interested in developments in house prices in particular countries would be well served by consulting these documents. Links to some recent reports that have featured house price developments are given below.

Country	Link to report	Pages	Date
Australia	Staff Report, Article IV	8	Oct-11
Canada	Staff Report, Article IV	30, 36	Dec-10
Canada	Selected Issues Paper, Article IV	3 to 16	Dec-10
China	Staff Report, Article IV	9 to 10	Jul-11
Denmark	Staff Report, Article IV	3, 9	Dec-10
France	Staff Report, Article IV	24 to 26, 30	Jul-11
Korea	Staff Report, Article IV	7, 25	Aug-11
Netherlands	Staff Report, Article IV	1, 18, 27	Jun-11
Netherlands	Selected Issues Paper, Article IV	47 to 55	Jun-11
Spain	Staff Report, Article IV	9	Jul-11
Sweden	Staff Report, Article IV	9 to 10	Jul-11
Switzerland	Staff Report, Article IV	8	May-11
United Kingdom	Staff Report, Article IV	8, 10, 30	Aug-11
United States	Staff Report, Article IV	19 to 22, 47	Jul-11
United States	Selected Issues Paper, Article IV	4 to 13	Jul-11

Also, see two powerpoint presentations on A look at housing prices around the world and Policy Options to Deal With Real Estate Booms. 

How does Fiscal Austerity affect the 99% vs. the 1%?

During times of fiscal austerity, income inequality goes up. Inequality goes up more when the austerity comes about through spending cuts than through tax hikes. The income share of the richest 1% of the population increases after fiscal austerity. Those are the main findings of a new paper by Luca Agnello and Ricardo Sousa.

The paper adds to a growing, but still scant, literature on how fiscal austerity affects different segments of the population. My paper with Larry Ball of Johns Hopkins University and my IMF colleague Daniel Leigh [available here] shows that fiscal austerity lowers incomes—hitting wage-earners more than others—and raises unemployment, particularly long-term unemployment. These costs must be balanced against the potential longer-term benefits that consolidation can confer.

See the discussion of this work by Paul Krugman, Washington Post and Huffington Post here.

Agnello and Sousa note that their results are “close in spirit” to the evidence of Ball, Leigh and Loungani that “fiscal consolidation reduces the wage share in total income. The authors suggest that, while the fall in wage income is persistent, the fall in capital and property income is short-lived. This can be explained by the fact that fiscal austerity plans typically call for a fall in public sector wages or lead to an increase in unemployment (in particular, long-term unemployment)” (p. 10, Agnello and Sousa).

IMF Book Forum on “Lost Decades: The Making of America’s Debt Crisis and the Long Recovery”

The talents of Menzie Chinn and Jeffry Frieden—a leading international economist and political scientist, respectively—have come together in a nice way in a new book on the U.S. financial crisis and the prospects for the country. The title of the book (“Lost Decades”) gives away what the authors think will happen.

A standing-room only audience at the IMF last month heard a presentation by Chinn and Frieden, along with comments from Diane Lim Rogers (Concord Coalition), Gail Cohen (Joint Economic Committee) and Simon Johnson (MIT and Peterson Institute). The forum was moderated by Nobel Prize-winner George Akerlof.

Two features of the book make it different from the many books on the crisis. The first is the authors’ position that this financial crisis was a typical foreign capital flow cycle in which money flowed in from abroad and was not used productively. In this respect, they say, the U.S. proved to be no different from Argentina in the 1990s or the U.S. in the 1880s.

The second distinctive feature is the book’s focus on the political tussle over who bears the costs of resolving the crisis. When “we turn to political economy,” Frieden quipped, “we’ll see that political economy is the truly dismal science.”

Frieden recalled that in 1985 the military dictator of Brazil made a famous speech in which he said Brazilians have to realize that the party is over. The next day on the streets of Sao Paolo and Rio, there were mass demonstrations and the banners read, “The party is over and we weren’t even invited.”

Frieden said that the demonstrations in the U.S. reflect the growing realization that “the benefits of the party [during the 2000s] were not equally shared while the burden is being unequally distributed.” Over the 2000-07 period, Frieden said, the top one percent of the U.S. population saw its income grow by 60 percent. But the bottom 99 percent of the population had income gains of only 6 percent and “of course that six percent [was] eaten away by the crisis.”

This was a theme picked up by Cohen in her remarks. “What I’m really concerned about,” she said, is that the lost decades that Chinn and Frieden fear “will only be for some segments of the population and that some people will do fine.” Simon Johnson concurred, noting that for some people decades have already been lost: “This is a continuation of losses.”

Cohen noted that long-term unemployment is at historically high levels: half of those unemployed have been out of work for over six months. African-American workers have been disproportionately hit, as have younger workers. The unemployment rate for younger workers is 20 percent. Her examples of the unequal distribution of pain supported Frieden’s assertion that some segments of the populations are “really almost at Depression levels of unemployment and underemployment.”

During the Q&A, the IMF’s Steve Phillips questioned the book’s focus on the international nature of the capital flows. Chinn and Frieden emphasize the “international aspects,” he said, “but you couldn’t have had the bubble without lax regulation. But you could have had a bubble and you could have had the crisis without international capital flows.” In his view, therefore, “the prerequisite was lax regulation.”

In response, Chinn acknowledged that it was difficult to distinguish between a capital flow boom-bust cycle and a credit boom-bust cycle and also agreed that the U.S. had “essentially disarmed ourselves in terms of regulation.” Nevertheless, he defended the book’s focus, saying that “it’s hard for me to think about a boom that doesn’t have some component of savings coming in from the rest of the world.”

The wisdom of the Bush tax cuts of 2001 and 2003 also generated some back-and-forth. In commenting on the book, Diane Lim Rogers noted that she and Menzie Chinn had “worked together at the end of the Clinton Administration on the Council of Economic Advisors and ever since then I became obsessed with the Bush tax cuts and the fiscal irresponsibility of them.”

Taking some issue with this, noted commentator Bruce Bartlett said that with hindsight it is easy to blame the tax cuts or other policy actions, but the main driving force behind the overborrowing was that “we had this huge increase in world saving that had to go somewhere … Even if [the U.S.] had kept the budget balanced, the money would have flowed into something else … Absent capital controls, what could we have done to keep the money out?”

Liaquat Ahamed, author of the 2010 Pulitzer Prize-winning book Lords of Finance, asked whether the debate over the short-run impacts of fiscal policy is really “a disagreement about how the economy actually works?” Frieden responded that “I think the conflicts here are not ideological and they’re not really theoretical … They’re really about who is going to pay the price.”

Event's transcript and webcast.

The IMF Book Forum was launched in September 2003. Over the years, it has featured nearly 30 books on international economics, political economy, and business cycle analysis.

                       

Photos: Michael Spilotro/IMF