Housing prices are on the march again across the globe, and the International Monetary Fund (IMF) is concerned. In response, the IMF has launched a site it calls the “Global Housing Watch.”
Here is the introduction:
“Housing is an essential sector of every country’s economy, but it has also been a source of instability for financial institutions and countries. Understanding the drivers of house price cycles, and how to moderate these cycles, is important for economic stability.
The new indicators are an important step in assembling country-level data on housing trends in one location, allowing for more transparent cross-country and historical comparisons. The hope is to prompt actions by policymakers to moderate housing cycles.”
Housing has been a natural beneficiary of loose monetary policies. The irony or dilemma in extremely expensive countries like the United Kingdom, Canada, France, and Australia is that overall inflation readings are low. Accordingly central banks are maintaining extremely accomodative monetary policies in these countries. Thus, the traditional brakes for the housing market, higher rates and tighter monetary policy, are absent and nowhere on the horizon. It is no accident that the Bank of Canada and the Bank of England are now talking more loudly about using macroprudential policies to contain housing markets and enforce standard of financial stability. Here are the related recommendations coming from the IMF:
“We do have a set of policy tools that can help – sometimes these are referred to as “Mip-Map-Mop.” Microprudential (Mip) policies look at an individual bank’s balance sheet, for example to determine if it is making too many real estate loans. But it could be that the individual banks are doing what seems healthy for them, but what the banking system as a whole is doing needs results in an unhealthy growth in lending.
So, in addition, macroprudential regulations (Map), operating at the level of the financial sector as a whole, come into play. The most commonly used measures cap how much individuals may borrow relative to their income. These prudential measures are being increasingly used by countries to prevent an unsustainable build-up in debt.
Finally, there is the monetary policy (Mop) that involves the central bank raising interest rates if they want to cool off the housing sector. This can be tricky, because sometimes the economy is weak but the housing sector is booming, and raising the interest rate can harm the overall economy.
So, basically, we need to share experience across countries, to look at trends, use our judgment, and apply policies that that may help prevent problems in the housing sector.””
I will be keeping an eye on this website and the twitter hastag #HousingWatch. I expect some revealing and fascinating data to flow through here. Here are the charts posted on the site showing the relative valuations of housing across the globe. I highly encourage the reader to go directly to the website and browse for yourself. I also hope to write some pieces covering the housing markets in the UK, Canada, and Australia in particular in coming weeks and months.
Note well that the U.S. is NOT in bubble territory (in the aggregate)….
On November 4, 2011, NPR’s Planet Money did a “blast from the past” podcast reviewing the course of events that led to the rice panic of 2007 and its eventual end. From India’s decision to ban rice exports to hoarding across Asia to corrupt government manipulation in the Philippines of a then vulnerable rice market, we get to reminisce about how rice prices doubled ad then almost doubled again in just four months. The panic finally ended after economists convinced the U.S. to allow Japan to sell its stockpile of rice that it maintains as part of a trade agreement that forces Japan to buy rice from the U.S. it does not want. Ironically enough, the rice was never sold but the psychological impact of the announcement was enough to end the hoarding and bring the market back to a semblance of sanity.
A truly fascinating tale of a completely avoidable bubble in the price of rice.
Land prices have doubled in Iowa over the past few years. The team at Planet Money conclude that the land boom throughout the agricultural U.S. Midwest is being driven by “real” economic forces. They identify low interest rates, grain traders, and government subsidies for ethanol as key drivers of this boom. Low interest rates are enabling land purchases. Grain traders and the demand for ethanol are driving up corn prices which in turn make land for growing corn more dear. Starting with auctions in Iowa, Planet Money takes us to a part of the country that is booming while much of the rest of the country is stagnating.
Finally, one “seasoned farmer” warns that this boom is indeed a bubble and points to the crash in land prices in the 1980s after a similar period of exuberance.
Listen to “The Tuesday Podcast: The Land Boom“
The Swiss National Bank (SNB) has been extremely reluctant to increase interest rates, presumably because its currency has been excessively strong. Meanwhile, its forecast for near-term inflation has increased, and the economy has performed reasonably well despite the strong currency (although tourism and exports have recently suffered a bit).
The pressure to increase rates may have ratcheted up a notch with Anne Heritier Lachat, the chairwoman of the Swiss Financial Market Supervisory Authority (FINMA), complaining about the potential for housing bubbles in Switzerland. Lachat cited in an interview that all the key ingredients for a bubble exist: low rates, demand exceeding supply, and the assumption that housing has once again become a safe investment. The direction of SNB monetary policy could get a lot more exciting from here…
Reuters reports that “China Steps up Fight Against Property Speculation“:
“Provincial and municipal governments in areas experiencing rapidly rising property prices may temporarily restrict the number of properties people may buy, in accordance with the situation in their jurisdictions, the State Council said.
The measures also made clear to banks that they would be expected not just to raise mortgage rates and down payment requirements, but to refuse credit to people who are clearly buying homes for speculative purposes.”
Specifically, banks are being asked to increase down payments and mortgage rates for people who already own two homes or more.
Apparently, China has a working definition of an asset bubble and is getting increasingly proactive about preventing (or slowing down) rampant asset inflation.
In “Housing Rebound in Canada Spurs Talk of a New Bubble” the WSJ paints a familiar picture of what can happen to an asset market when interest rates drop to extremely low levels. Although Canada never experienced a housing crash like that of the U.S., the Bank of Canada still dropped rates to near-zero to help support the domestic economy. Its efforts to support exports (primarily to the U.S.) have been thwarted for much of the past year given the sharp rise in the Canadian dollar.
Here are some highlights from the article that describe the frenetic pace of the current Canadian housing market:
- The average home price rose 23% from the trough in January, 2009, hitting a record according to one broad measure.
- Home-sales volumes are up 70% since January, 2009.
- Housing starts in December reached levels last seen October 2008 (no indication whether these stats were seasonally adjusted).
- “Household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.”
The response of the Bank of Canada speaks to the trap facing policymakers as they contemplate transitioning monetary away from extremely accomodative levels. The WSJ reports:
“…Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: ‘If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.'”
The Canadians avoided the worst of the recent global meltdown. Let’s hope they did not avoid the fire only to land in the frying pan.
Times Online is reporting that property prices in China rose 7.8% year-over-year in December – the fastest pace since 2008:
“Property prices across China’s 70 largest cities surged at their fastest pace since 2008 in December, stoking rising anxiety in Beijing that a speculative bubble may be forming and that Chinese banks may have issued more than £70 billion in new bank loans since January 1.
Residential and commercial property rose an average 7.8 per cent from a year earlier in December, according to data from the National Development and Reform Commission – far higher than the 5.7 per cent year-on-year rise in November and a number that disguises the more rabid clip of property price inflation in cities like Shanghai and Beijing.”