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Article

Hites Ahir and Prakash Loungani

On average across countries, house prices have been on an upward trend over the past 50 years, following a 100-year period over which there was no long-term increase. The rising trend in prices reflects a demand boost due to greater availability of housing finance running up against supply constraints, as land has increasingly become a fixed factor for many reasons. The entire 150-year period has been marked by boom and bust cycles around the trend. These also reflect episodes of demand momentum—due to cheap finance or reasonable or unreasonable expectations of higher incomes—meeting a sluggish supply response. Policy options to manage boom–bust cycles, given the significant costs to the economy from house price busts, are discussed.

Article

Charles Ka Yui Leung and Cho Yiu Joe Ng

This article summarizes research on the macroeconomic aspects of the housing market. In terms of the macroeconomic stylized facts, this article demonstrates that with respect to business cycle frequency, there was a general decrease in the association between macroeconomic variables (MV), such as the real GDP and inflation rate, and housing market variables (HMV), such as the housing price and the vacancy rate, following the global financial crisis (GFC). However, there are macro-finance variables, such as different interest rate spreads, that exhibited a strong association with the HMV following the GFC. For the medium-term business cycle frequency, some but not all patterns prevail. These “new stylized facts” suggest that a reconsideration and refinement of existing “macro-housing” theories would be appropriate. This article also provides a review of the corresponding academic literature, which may enhance our understanding of the evolving macro-housing–finance linkage.

Article

The house price boom that has been present in most Chinese cities since the early 2000s has triggered substantial interest in the role that China’s housing policy plays in its housing market and macroeconomy, with an extensive literature employing both empirical and theoretical perspectives developed over the past decade. This research finds that the privatization of China’s housing market, which encouraged households living in state-owned housing to purchase their homes at prices far below their market value, contributed to a rapid increase in homeownership beginning in the mid-1990s. Housing market privatization also has led to a significant increase in both housing and nonhousing consumption, but these benefits are unevenly distributed across households. With the policy goal of making homeownership affordable for the average household, the Housing Provident Fund contributes positively to homeownership rates. By contrast, the effectiveness of housing policies to make housing affordable for low-income households has been weaker in recent years. Moreover, a large body of empirical research shows that the unintended consequences of housing market privatization have been a persistent increase in housing prices since the early 2000s, which has been accompanied by soaring land prices, high vacancy rates, and high price-to-income and price-to-rent ratios. The literature has differing views regarding the sustainability of China’s housing boom. On a theoretical front, economists find that rising housing demand, due to both consumption and investment purposes, is important to understanding China’s prolonged housing boom, and that land-use policy, which influences the supply side of the housing market, lies at the center of China’s housing boom. However, regulatory policies, such as housing purchase restrictions and property taxes, have had mixed effects on the housing market in different cities. In addition to China’s housing policy and its direct effects on the nation’s housing market, research finds that China’s housing policy impacts its macroeconomy via the transmission of house price dynamics into the household and corporate sectors. High housing prices have a heterogenous impact on the consumption and savings of different types of households but tend to discourage household labor supply. Meanwhile, rising house prices encourage housing investment by non–real-estate firms, which crowds out nonhousing investment, lowers the availability of noncollateralized business loans, and reduces productive efficiency via the misallocation of capital and managerial talent.

Article

The global financial crisis of 2007–2009 helped usher in a stronger consensus about the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. The latest research regards the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000s experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge. Research indicates that fundamentals such as productivity, income, and demographics play an important role in generating sustained movements in house prices. While these forces can also contribute to boom-bust episodes, periods of large house price swings often reflect an evolving housing premium caused by financial innovation and shifts in expectations, which are in turn amplified by changes to the liquidity of homes. Regarding credit, the latest evidence indicates that expansions in lending to marginal borrowers via the subprime market may not be entirely to blame for the run-up in mortgage debt and prices that preceded the 2007–2009 financial crisis. Instead, the expansion in credit manifested by lower mortgage rates was broad-based and caused borrowers across a wide range of incomes and credit scores to dramatically increase their mortgage debt. To whatever extent changing beliefs about future housing appreciation may have contributed to higher realized house price growth in the 2000s, it appears that neither borrowers nor lenders anticipated the subsequent collapse in house prices. However, expectations about future credit conditions—including the prospect of rising interest rates—may have contributed to the downturn. For macroeconomists and those otherwise interested in the broader economic implications of the housing market, a growing body of evidence combining micro data and structural modeling finds that large swings in house prices can produce large disruptions to consumption, the labor market, and output. Central to this transmission is the composition of household balance sheets—not just the amount of net worth, but also how that net worth is allocated between short term liquid assets, illiquid housing wealth, and long-term defaultable mortgage debt. By shaping the incentive to default, foreclosure laws have a profound ex-ante effect on the supply of credit as well as on the ex-post economic response to large shocks that affect households’ degree of financial distress. On the policy front, research finds mixed results for some of the crisis-related interventions implemented in the U.S. while providing guidance for future measures should another housing bust of similar or greater magnitude reoccur. Lessons are also provided for the development of macroprudential policy aimed at preventing such a future crisis without unduly constraining economic performance in good times.