Fundamental Drivers of House Prices in Advanced Economies

Fundamental Drivers of House Prices in Advanced Economies
Author: Ms.Nan Geng
Publisher: International Monetary Fund
Total Pages: 24
Release: 2018-07-18
Genre: Business & Economics
ISBN: 1484369122

House prices in many advanced economies have risen substantially in recent decades. But experience indicates that housing prices can diverge from their long-run equilibrium or sustainable levels, potentially followed by adjustments that impact macroeconomic and financial stability. Therefore there is a need to monitor house prices and assess whether they are sustainable. This paper focuses on fundamentals expected to drive long run trends in house prices, including institutional and structural factors. The scale of potential valuation gaps is gauged on the basis of a cross-country panel analysis of house prices in 20 OECD countries.

House Prices and the Macroeconomy

House Prices and the Macroeconomy
Author: Charles Goodhart
Publisher: OUP Oxford
Total Pages: 246
Release: 2006-12-21
Genre: Business & Economics
ISBN: 0191514039

House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in most developed countries. This book elucidates the two-way relationship between house-price fluctuations and economic fundamentals. Housing has many features which make it distinct from other assets, like equity. Real estate is not only an asset but also a durable consumption good for households, providing shelter and other housing services. As a result, a house is often the largest and most important asset of households and therefore accounts for a major share of household wealth. Similarly a large share of bank assets is tied to housing values. House price fluctuations may, therefore, have a major effect on economic activity and the soundness of the financial system. Following an introductory chapter, the book is structured into three parts. The first demonstrates the importance of house prices as determinants or indicators of inflation and economic activity. The second focuses on the inter-relationships between bank credit extension and housing prices, and how bubbles can lead to financial crises. The third discusses resultant public policy issues, such as whether, and how, to include housing prices in a general inflation index, and how to restrain the housing/bank credit cycle.

Global House Price Fluctuations

Global House Price Fluctuations
Author: Mr.Hideaki Hirata
Publisher: International Monetary Fund
Total Pages: 47
Release: 2013-02-06
Genre: Business & Economics
ISBN: 1475591608

We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices.

Three Cycles

Three Cycles
Author: Alain N. Kabundi
Publisher: International Monetary Fund
Total Pages: 34
Release: 2009-10-01
Genre: Business & Economics
ISBN: 1451873786

We examine the characteristics and comovement of cycles in house prices, credit, real activity and interest rates in advanced economies during the past 25 years, using a dynamic generalized factor model. House price cycles generally lead credit and business cycles over the long term, while in the short to medium term the relationship varies across countries. Interest rates tend to lag other cycles at all time horizons. While global factors are important, the U.S. business cycle, house price cycle and interest rate cycle generally lead the respective cycles in other countries over all time horizons, while the U.S. credit cycle leads mainly over the long term.

Foreign Demand and Local House Prices: Evidence from the US

Foreign Demand and Local House Prices: Evidence from the US
Author: Mr.Damien Puy
Publisher: International Monetary Fund
Total Pages: 31
Release: 2020-02-28
Genre: Business & Economics
ISBN: 1513529269

We test whether foreign demand matters for local house prices in the US using an identification strategy based on the existence of “home bias abroad” in international real estate markets. Following an extreme political crisis event abroad, a proxy for a strong and exogenous shift in foreign demand, we show that house prices rise disproportionately more in neighbourhoods with a high concentration of population originating from the crisis country. This effect is strong, persistent, and robust to the exclusion of major cities. We also show that areas that were already expensive in the late 1990s have experienced the strongest foreign demand shocks and the biggest drop in affordability between 2000 and 2017. Our findings suggest a non-trivial causal effect of foreign demand shocks on local house prices over the last 20 years, especially in neighbourhoods that were already rather unaffordable for the median household.

Global House Price Fluctuations

Global House Price Fluctuations
Author: Hideaki Hirata
Publisher:
Total Pages: 25
Release: 2012
Genre: Economics
ISBN:

We examine the properties of house price fluctuations across eighteen advanced economies over the past forty years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices -- National Bureau of Economic Research web site.

Predicting Downside Risks to House Prices and Macro-Financial Stability

Predicting Downside Risks to House Prices and Macro-Financial Stability
Author: Andrea Deghi
Publisher: International Monetary Fund
Total Pages: 47
Release: 2020-01-17
Genre: Business & Economics
ISBN: 1513525832

This paper predicts downside risks to future real house price growth (house-prices-at-risk or HaR) in 32 advanced and emerging market economies. Through a macro-model and predictive quantile regressions, we show that current house price overvaluation, excessive credit growth, and tighter financial conditions jointly forecast higher house-prices-at-risk up to three years ahead. House-prices-at-risk help predict future growth at-risk and financial crises. We also investigate and propose policy solutions for preventing the identified risks. We find that overall, a tightening of macroprudential policy is the most effective at curbing downside risks to house prices, whereas a loosening of conventional monetary policy reduces downside risks only in advanced economies and only in the short-term.

Price Expectations and the U.S. Housing Boom

Price Expectations and the U.S. Housing Boom
Author: Pascal Towbin
Publisher: International Monetary Fund
Total Pages: 35
Release: 2015-07-30
Genre: Business & Economics
ISBN: 1513596233

Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals.

Assessing House Prices with Prudential and Valuation Measures

Assessing House Prices with Prudential and Valuation Measures
Author: Michal Andrle
Publisher: International Monetary Fund
Total Pages: 42
Release: 2019-03-18
Genre: Business & Economics
ISBN: 1498304400

In this paper we provide tools for assessing the house prices and housing valuation. We develop two approaches: (i) borrowing capacity approach, and (ii) intrinsic value approach. The borrowing capacity of households, together with their down payment, implies how much housing they can attain. In the intrinsic value approach, property value is viewed as a discounted present value of adjusted net rental income. Our approach does not involve a complex econometric model and only widely available data are used. The proposed indicators can guide households, financial markets and macroprudential authorities in their understanding of house prices development. To illustrate the concepts, we analyze the housing prices in the Czech Republic and assess the degree of market over-and undervaluation.

Interest Rate Elasticity of Residential Housing Prices

Interest Rate Elasticity of Residential Housing Prices
Author: Mr.Martin Cihak
Publisher: International Monetary Fund
Total Pages: 34
Release: 2008-10-01
Genre: Business & Economics
ISBN: 1451871058

We examine the interest rate elasticity of housing prices, advancingthe empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry-out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices.