Global Boom in House Prices Becomes a Dilemma for Central Banks

Surging house prices across much of the globe are emerging as a key test for central banks’ ability to rein in their crisis support.

Withdrawing stimulus too slowly risks inflating real estate further and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic.

Bubble Trouble

Countries seeing surging real house price growth

Source: OECD

With memories of the global financial crisis that was triggered by a housing bust still fresh in policy makers minds, how to keep a grip on soaring house prices is a dilemma in the forefront of deliberations as recovering growth sees some central banks discuss slowing asset purchases and even raising interest rates.

Federal Reserve officials who favor tapering their bond buying program have cited rising house prices as one reason to do so. In particular, they are looking hard at the Fed’s purchases of mortgage backed securities, which some worry are stoking housing demand in an already hot market.

In the coming week, central bankers in New Zealand, South Korea and Canada meet to set policy, with soaring home prices in each spurring pressure to do something to keep homes affordable for regular workers.

New Zealand policy makers are battling the hottest property market in the world, according to the Bloomberg Economics global bubble ranking. The central bank, which meets Wednesday, has been given another tool to tackle the issue, and its projections for the official cash rate show it starting to rise in the second half of 2022.

Facing criticism for its role in stoking housing prices, Canada’s central bank has been among the first from advanced economies to shift to a less expansionary policy, with another round of tapering expected at a policy decision also on Wednesday.

The Bank of Korea last month warned that real estate is “significantly overpriced” and the burden of household debt repayment is growing. But a worsening virus outbreak may be a more pressing concern at Thursday’s policy meeting in Seoul.

In its biggest strategic rethink since the creation of the euro, the European Central Bank this month raised its inflation target and in a nod to housing pressures, officials will start considering owner-occupied housing costs in their supplementary measures of inflation.

The Bank of England last month indicated unease about the U.K. housing market. Norges Bank is another authority to have signaled it’s worried about the effect of ultra-low rates on the housing market and the risk of a build-up of financial imbalances.

Beginning of the End of Easy Money: Central Bank Quarterly Guide

The Bank for International Settlements used its annual report released last month to warn that house prices had risen more steeply during the pandemic than fundamentals would suggest, increasing the sector’s vulnerability if borrowing costs rise.

While the unwinding of pandemic-era is support is expected to be gradual for most central banks, how to do so without hurting mortgage holders will be a key challenge, according to Kazuo Momma, who used to be in charge of monetary policy at the Bank of Japan.

“Monetary policy is a blunt tool,” said Momma, who now works as an economist at Mizuho Research Institute. “If it is used for some specific purposes like restraining housing market activities, that could lead to other problems like overkilling the economic recovery.”

But not acting carries other risks. Analysis by Bloomberg Economics shows that housing markets are already exhibiting 2008 style bubble warnings, stoking warnings of financial imbalances and deepening inequality.

New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard focused on member countries of the Organisation for Economic Co-operation and Development. The U.K. and the U.S. are also near the top of the risk rankings.

As many economies still grapple with the virus or slow loan growth, central bankers may look for alternatives to interest-rate hikes such as changes to loan-to-value limits or risk weighting of mortgages — so called macro-prudential policy.

Yet such measures aren’t guaranteed to succeed because other dynamics like inadequate supply or government tax policies are important variables for housing too. And while ever cheap money is gushing from central banks, such measures are likely to struggle to rein in prices.

“The best approach would be to stop the further expansion of central bank balance sheets,” according to Gunther Schnabl of Leipzig University, who is an expert on international monetary systems. “As a second step, interest rates could be increased in a very slow and diligent manner over a long time period.”

Another possibility is that house prices reach a natural plateau. U.K. house prices, for example, fell for the first time in five months in June, a sign that the property market may have lost momentum as a tax incentive was due to come to an end.

There’s no sign of that in the U.S. though, where demand for homes remains strong despite record-high prices. Pending home sales increased across all U.S. regions in May, with the Northeast and West posting the largest gains.

While navigating the housing boom won’t be easy for central banks, it may not be too late to ward off the next crisis. Owner-occupy demand versus speculative buying remains a strong driver of growth. Banks aren’t showing signs of the kind of loose lending that preceded the global financial crisis, according to James Pomeroy, a global economist at HSBC Holdings Plc.

“If house prices are rising due to a shift in supply versus demand, which the pandemic has created due to more remote working and people wanting more space, it may not trigger a crisis in the same way as previous housing booms,” said Pomeroy. “The problems may arise further down the line, with younger people priced out of the property ladder even more.”

Read More:
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World’s Bubbliest Housing Markets Flash 2008 Style Warnings

Stimulus ‘Pandexit’ Is Next Challenge as Recovery Quickens

As they tip toe away from their crisis settings, monetary authorities in economies with heavily indebted households will need to be especially careful, said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis who used to work for the ECB and International Monetary Fund.

“Real estate prices, as with other asset prices, will continue to balloon as long as global liquidity remains so ample,” she said. “But the implications are much more severe than other asset prices as they affect households much more widely.”

— With assistance by Theophilos Argitis, and Peggy Collins

By:

Source: Global Boom in House Prices Becomes a Dilemma for Central Banks – Bloomberg

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Critics:

A housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. First there is a period where house prices increase dramatically, driven more and more by speculation. In the second phase, house prices fall dramatically.

Housing bubbles tend to be among the asset bubbles with the largest effect on the real economy, because they are credit-fueled, because a large number of households participate and not just investors, and because the wealth effect from housing tends to be larger than for other types of financial assets.

References

  • Brunnermeier, M.K. and Oehmke, M. (2012) Bubbles, Financial Crises, and Systemic Risk NBER Working Paper No. 18398
  • see eg. Case, K.E., Quigley, J. and Shiller R. (2001). Comparing wealth effects: the stock market versus the housing market. National Bureau of Economic Research, Working Paper No. 8606., Benjamin, J., Chinloy, P. and Jud, D. (2004). ”Real estate versus financial wealth in consumption”. In: Journal of Real Estate Finance and Economics 29, pp. 341-354., Campbell, J. and J. Cocco (2004), How Do Housing Price Affect Consumption? Evidence from Micro Data. Harvard Institute of Economic Research, Discussion Paper No. 2045
  • Stiglitz, J.E. (1990). “Symposium on bubbles”. In: Journal of Economic Perspectives Vol. 4 No. 2, pp. 13-18.
  • Palgrave, R.H. I. (1926), “Palgrave’s Dictionary of Political Economy”, MacMillan & Co., London, England, p. 181.
  • Flood, R. P. and Hodrick, R. J. (1990), “On Testing for Speculative Bubbles”, The Journal of Economic Perspectives, Vol. 4 No. 2, pp. 85–101.
  • Shiller, R.J. (2005). Irrational Exuberance. 3nd. New Jersey: Princeton University Press. ISBN 0-691- 12335-7.
  • Smith, M. H. and Smith, G. (2006), “Bubble, Bubble, Where’s the Housing Bubble?”, Brookings Papers on Economic Activity, Vol. 2006 No. 1, pp. 1–50.
  • Cochrane, J. H. (2010), “Discount Rates”, Working paper, University of Chicago, Booth School of Business, and NBER, Chicago, Illinois, 27 December.Lind, H. (2009). “Price bubbles in housing markets: concept, theory and indicators”. In: International Journal of Housing Markets and Analysis Vol. 2 No. 1, pp. 78-90.

America’s Failure To Build Is Driving Home Prices Ever Higher

Some progressive groups oppose rezoning New York's wealthy Soho area to allow more housing

Another month, another explosive rise in home prices.  May’s median annual housing price rose 23.6%, a new monthly record.   Buyers are still buying, helped by low interest and mortgage rates.  But since housing construction hasn’t kept pace with demand and economic growth, it will take more housing production to reduce long-term pressure on prices.

The buying pressure in housing markets is setting records.  Although home sales fell slightly in May compared to April, houses aren’t sitting very long on the market.  According to the National Association of Realtors, total housing inventory is down 20.6% from a year ago.  Properties only last on the market for an average of 17 days, and 89% of sales in May “were on the market for less than a month.”

Given this high demand, we’d expect supply to respond.  Ronnie Walker at Goldman Sachs notes housing starts are rising, hitting their highest levels since 2006.  But it isn’t cooling the market off.  But Walker says despite these higher starts, “red-hot demand has brought the supply of homes available for sale down to the lowest level since the 1970s.”

Walker expects a “persistent supply-demand imbalance in the years ahead.”  New construction will come online, and more sellers eventually will enter the market, but his model foresees “home prices grow(ing) at double digit rates both this year and next.”

Tight future markets are confirmed by Harvard’s Joint Center for Housing Studies (JCHS).  In their 2021 report, these experts say “the supply of existing homes for sale has never been tighter,” and is at its lowest level since 1982.

So where are the houses?  What happened to supply and demand?  JCHS notes several reasons for underproduction, but the primary blame goes to restrictive local policies such as single-family zoning, minimum lot sizes, parking requirements, etc.  A 2018 survey of over 2700 communities found “93 percent imposed minimum lot sizes” with 67 percent requiring lots of at least one acre in size and sometimes more, many in suburban towns.

What about big cities?  Despite perceptions that there’s a lot of development in many cities, not much housing has been built in some.  Between 2010 and 2018, jobs in New York City increased by 22% “while the housing stock only increased four percent.”  Jobs in San Francisco and San Mateo counties rose by over 30% between 2010 and 2019, while new housing permits only rose by 7%.

There are strong political biases in these cities against more construction, but other liberal places are re-examining their housing policies, especially single-family zoning.  A New York Times 2019 analysis confirmed that many cities’ land area is dominated by single-family zoning —70% in Minneapolis, 75% in Los Angeles, 79% in Chicago, 81% in Seattle, and 94% in San Jose.  Combined with excessive parking requirements, zoning policy effectively takes land out of production while pushing its price sky-high and preventing multifamily options.

Cities’ anti-development policy means new housing is pushed further out in the metropolitan area, adding to suburban sprawl, longer commute times, and environmental damage.  Ironically, some progressive environmental groups have allied with anti-development forces, with the net result of fostering suburban sprawl.

In New York City, the left Sunrise Movement has joined with many other groups to oppose “upzoning” for higher density and more development in Manhattan’s Soho neighborhood, one of the wealthiest in the nation.  In contrast, Berkeley California, one of the most liberal cities in the nation, has voted to end single family zoning, persuaded by the argument that such policies result in racially segregated neighborhoods and lack of affordable housing for people of color.

But it isn’t just liberal cities that face this problem.  Even though red states like North Dakota, Utah, and Texas lead the nation in home building, a recent study found that only four of America’s 25 largest metropolitan areas “built enough homes to match local job growth.”  And much of that growth was in outlying suburbs, adding to sprawl and pollution.

Urban economist Ed Glaeser locates a good deal of the problem in the rising power of local citizen groups, especially existing homeowners.  Their housing investments often rise in value with scarcity, and they usually like the existing neighborhoods where they reside and don’t want new residents.

This creates an “insider/outsider” problem that limits housing. As Glaeser notes, current homeowners don’t “internalize the interests of those who live elsewhere and would want to come to the city…their political actions are more likely to exclude than to embrace.”  These anti-housing groups often are labelled “NIMBYs”, for “Not In My Back Yard.”

In response, so-called “YIMBYs” (Yes In My Back Yard) are pushing for policies such as relaxed zoning, allowing multi-family housing (at least duplexes to quadplexes) on single family lots, and allowing denser housing near mass transit stops (“TOD”, for “Transit Oriented Development.”).  They are having some success, but anti-development forces are deeply entrenched and politically powerful in many places around the country.

But would more development create not just housing, but add to affordable housing?  What about the impact on low-income and non-white families, who could face rising rents or displacement from gentrification while still not being able to buy a house?  In my next blog, we’ll look at the tangled racial history of housing development and home ownership. Unless renters and lower-income people can be mobilized to support development, NIMBY opposition to more housing will be hard to overcome.

Follow me on Twitter or LinkedIn.

I’m an economist at the New School’s Schwartz Center (https://www.economicpolicyresearch.org), currently writing a book for Columbia University Press on cities and inequality.  I have extensive public sector experience studying cities and states.  I’ve served as Executive Director of the Congressional Joint Economic Committee, Assistant Secretary of Labor for Policy, Deputy Commissioner for Policy and Research at New York State’s Department of Economic Development, and New York City Deputy Comptroller for Policy and Management.  I also worked as Director of Impact Assessment at the Ford Foundation.

Source: America’s Failure To Build Is Driving Home Prices Ever Higher

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Critics:

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets. In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble “the most significant risk to our economy”.

Any collapse of the U.S. housing bubble has a direct impact not only on home valuations, but mortgage markets, home builders, real estate, home supply retail outlets, Wall Street hedge funds held by large institutional investors, and foreign banks, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President George W. Bush and the Chairman of the Federal Reserve Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners who were unable to pay their mortgage debts.

In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the U.S. housing bubble. This was shared between the public sector and the private sector. Because of the large market share of Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (both of which are government-sponsored enterprises) as well as the Federal Housing Administration, they received a substantial share of government support, even though their mortgages were more conservatively underwritten and actually performed better than those of the private sector.

See also

U.S. Households’ Net Worth Hits Record $123.5 Trillion As Stocks Boom, But Debt Is Also Surging

While unemployment has remained stubbornly above pre-pandemic levels, record highs in the stock market have pushed the net worth of all households in the U.S. to a new high, despite the fast growth in household debt.

The net worth of households in the United States climbed to $123.5 trillion in the third quarter, up 8% from a year ago, the Federal Reserve said in a report Wednesday.

The Fed, which calculates net worths by subtracting overall debt held from the sum of assets like savings and equities, attributed the gains to the surging value of stocks, which jumped $2.8 trillion in the third quarter, as well as real estate, which increased in net value by $400 billion.

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Meanwhile, household debt, which includes mortgages, credit card debt and personal loans, jumped at an annual rate of 5.6% in the third quarter, reaching $16.4 trillion; that’s the fastest growth this decade, beating out a 3.9% increase in 2017.

Business debt fell 0.9% to $17.5 trillion in the third quarter, while federal government debt jumped 9.1% to $26 trillion.

CRUCIAL QUOTE 

“We’ve seen home prices rise, market prices for tradable instruments rise and savings increase… but those gains skew to upper income people,” KPMG Chief Economist Constance Hunter told the Wall Street Journal. “It’s a vicious cycle,” she added of the pandemic’s disparate impact on lower-income Americans. “Not only are lower-income households more impacted, they also are less likely to have the resources to draw upon to support their families.”

KEY BACKGROUND

The S&P 500 jumped 8% in the third quarter, while the tech-heavy Nasdaq Composite soared nearly 12%, and both have reached record highs in the fourth quarter–as has the Dow Jones Industrial Average. But far from everyone benefits from those gains. According to a Gallup poll in March and April, just 22% of Americans making less than $40,000 annually said they owned any stocks, compared to 84% of people making at least $100,000 per year.

TANGENT

There were 10.9 million unemployed people in the country last month, when the U.S. economy added a much lower-than-expected 245,000 jobs, according to data released by the Bureau of Labor Statistics last week. The number of unemployed people in the U.S. remains more than three times higher than it was before the pandemic, during which 22 million Americans have been forced into unemployment.

FURTHER READING

U.S. Household Net Worth Hits Record in Third Quarter (WSJ)

Unemployment Claims Spike Again As Covid-19 Spreads And Americans Wait For Federal Relief (Forbes)

10.9 Million Americans Are Still Unemployed—Rate Ticks Down To 6.7%, But Job Market Could Take Years To Recover (Forbes)Follow me on Twitter. Send me a secure tipJonathan Ponciano

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

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