Transcript 3DavisArmstrong - National Institute of Economic and Social

COMPARING HOUSING BOOMS
AND MORTGAGE SUPPLY IN THE
MAJOR OECD COUNTRIES
Angus Armstrong and E Philip Davis
NIESR and Brunel University
London
Introduction
• The house price and lending boom of the 2000s is widely
seen as the main and unique cause of the financial crisis
that began in 2007. However, looking to the past, we
find a similar boom in the late 1980s which did not lead
directly to a global systemic banking crisis
• This raises the question whether the received wisdom is
incorrect, and other factors than the housing boom
caused the crisis, while macroprudential policy is overly
targeted at the control of house prices and lending per
se. Accordingly, in this paper we compare and contrast
the cycles in house prices over 1985-94 with 2002-11.
• The cycles entailed a similar rise in real house prices where booms took
place, and a marked rise in the real mortgage stock along with real
incomes and real financial wealth. The aftermath periods are also
comparable in terms of house price changes as are econometric
determinants of house prices in the two cycles since liberalisation.
• There remain some contrasts. Leverage rose far more in the later
episode and did not contract in the aftermath. Adjustment to the long
run is slower in the recent cycle. The earlier boom period showed
differences with average house price behaviour which was not mirrored
in the most recent boom.
• Despite the contrasts, on balance we suggest the evidence is contrary to
the idea that the recent boom was in some way unique and hence the
key cause of the crisis. Among areas for further research to capture
factors underlying the recent crisis are the impact of initial levels of
debt/income, or inflation, of global liquidity and monetary policy
decisions, of wider securitisation, and of changing owner occupation
rates and population densities. These could also be relevant for
calibrating macroprudential policies.
House prices, income, wealth and debt during
booms
Percentage
change
1985q1
-89q4
2002q1
-06q4
1985q1
-89q4
2002q1
-06q4
1985q1
-89q4
Real gross
financial
wealth
Nominal
house
prices
Real household
debt
RPDI
Real house
prices
2002q1
-06q4
1985
q189q4
2002
q106q4
1985
q189q4
2002
q106q4
65
44
4
78
35
36
90
4
21
56
67
69
35
52
-20
61
31
37
65
27
50
95
35
46
56
22
76
57
94
80
17
33
9
26
17
10
41
27
19
1
58
48
42
52
16
United Kingdom
71
49
23
10
74
50
United States
12
29
17
14
40
48
1
-2
18
5
18
-3
France
28
64
14
11
51
42
Canada
32
25
17
19
53
44
Italy
32
20
17
3
88
40
110
62
27
17
23
83
Austria
68
-5
21
13
16
26
Netherlands
24
11
16
-2
16
42
Belgium
32
41
17
3
21
29
Denmark
-8
56
5
10
21
44
Ireland
12
48
16
18
38
145
Finland
56
32
24
17
78
83
Sweden
35
44
10
12
35
45
Japan
27
-17
22
4
59
0
112
31
6
49
60
76
190
81
25
46
8
33
91
78
33
Mean
Mean (boom
countries)
35
30
18
10
42
48
61
42
55
28
40
39
Germany
Spain
Correlation
Correlation
(boom countries)
18
11
47
59
0.74
0.41
0.14
0.58
72
0.95
53
0.99
60
0.47
28
0.49
0.79
0.42
0.06
0.30
0.97
0.97
0.49
0.35
The aftermath of booms
Percentage
change
Real house prices
RPDI
1990q1
-94q4
1990q1
-94q4
2007q1
-11q4
Real household
debt
2007q1
-11q4
1990q1
-94q4
2007q1
-11q4
Nominal
house
prices
Real gross
financial
wealth
1990
q194q4
2007
q111q4
1990
q194q4
2007
q111q4
0
-17
9
7
9
3
-16
15
-5
18
-18
-48
13
17
-13
21
16
29
17
18
15
19
21
14
-3
-1
18
-16
-22
12
-6
-4
2
3
16
-17
-14
5
9
-2
-4
6
-4
5
0
-26
7
11
8
-18
28
Japan
-9
-8
9
0
19
-2
-5
11
16
1
-8
45
22
13
38
28
9
14
-32
-7
-2
Mean
Mean (boom
countries)
-6
-7
7
2
8
10
9
-2
10
0
-7
-6
United Kingdom
-21
-14
12
3
10
-8
-24
12
6
19
-9
11
5
25
-7
United States
-3
Germany
-2
France
-8
-1
7
3
-4
22
-18
2
-1
11
13
36
Canada
na
Italy
12
-6
-2
-6
32
10
Spain
-7
-23
10
-2
8
-1
Austria
-2
4
12
0
14
5
Netherlands
21
-9
8
0
22
18
Belgium
14
7
14
2
9
23
0
-26
8
2
-19
12
14
-4
15
8
0
-13
8
-21
20
Denmark
Ireland
0
Finland
-42
Sweden
Correlation
Correlation
(boom countries)
na
6
3
8
13
0.46
0.29
0.62
0.67
10
0.93
-2
0.97
9
0.41
-1
0.22
0.46
0.38
0.78
0.88
0.86
0.82
0.19
0.61
Indicators of leverage in booms and the
aftermath
United Kingdom
Debt/personal income
ratio –
change in percentage
points
Debt/house prices –
percentage change
1985q189q4
1985q189q4
2002q106q4
Debt/personal
income ratio –
change in
percentage
points
1990q
2007q
1194q4
11q4
2002q106q4
Debt/house
prices –
percentage
change
1990q
194q4
2007q
111q4
25
30
2
1
-1
-10
39
7
3
6
25
15
1
-3
22
20
-1
-5
17
-1
10
-8
28
-9
9
12
18
-13
-4
10
5
23
14
16
16
15
7
24
39
34
8
14
42
17
7
9
17
17
Spain
-3
35
-42
13
-2
2
17
29
Austria
-1
8
-31
34
0
2
16
1
Netherlands
1
43
-6
28
7
24
1
30
Belgium
3
11
-9
-8
-2
10
-5
15
Denmark
8
44
32
-8
-33
16
-19
52
Ireland
13
84
23
65
-2
22
15
100
Finland
17
26
14
39
-9
10
35
20
Sweden
9
21
0
1
-12
24
12
20
21
-5
25
21
9
-5
31
7
8
23
9
15
-2
8
17
24
9
27
8
16
-1
11
18
28
United States
Germany
France
Canada
Italy
Japan
Mean
mean (boom
countries)
•
Specifications for house price
determination
Typically link of house prices to determinants in cointegrating framework followed by
allowance for dynamics in error correction framework (inverted demand function). For
example Capozza et al (2002) focus on serial correlation and mean reversion using
•
•
•
As α increases, the amplitude and persistence of the cycle will increase whilst as β increases
the frequency and the amplitude of the cycle will Increase. P* includes population levels,
real median income levels , the long-run (5 year) population growth rate , real construction
costs and the user cost of housing in US regions
Other recent studies use similar variables as long run determinants of house prices, for
example:
– Muellbauer and Murphy (2008) real disposable (non-property) income, the sum of mortgage rates and
stamp duty rates, the national credit conditions index and a term which interacts the mortgage rate with
the credit conditions index
– Barrell, Kirby and Whitworth (2011) include the real borrowing rate, the 3-month nominal interest rate,
the loan-to-income ratio, the loan-to-value ratio, per capita real disposable income, the ratio of the
number of households to the housing stock, and the number of households.
– Adams and Fuss (2010) include economic activity, construction costs and the
long term interest rate.
– Loungini and Igan (2012) model real house price changes as a function of
changes in disposable income, working-age population, equity prices, credit, and
thee level of short- and long-term interest rates.
• While most work has been on individual countries, recent pooled or panel
studies include our own work (Davis et al 2011) for 18 OECD countries,
which was focused on the possible use of macroprudential tools in housing,
Capozza et al (2002) who look at US Metropolitan areas, Adams and Fuss
(2010) apply panel cointegration to 15 countries using Dynamic Ordinary
Least Squares, while Igan and Loungini (2012) apply pooled OLS to 22
countries.
• All approaches to house price determination are fraught with identification
problems, which make it difficult to separate supply and demand factors,
and exogenous and endogenous determinants of house prices. All work on
house prices faces this challenge and there is no definitive solution,
although suggestions can be made both for ECMs and VAR/VECMs.
Possible additional variables
•
•
•
•
•
•
Unemployment
Banking crises
Value of the housing stock
Mortgage spreads
Gross financial wealth
[Stock of mortgage debt]
Approach to estimation
• Panel estimation for 11 OECD countries
– scope to investigate the common patterns of property price movements, while at
the same time controlling for heterogeneity across countries or at different stages
of real estate cycles
– panel approach gives more informative data, more variability, less collinearity
among variables, more degrees of freedom and more efficiency
– following Capozza et al (2002) allowing for serial correlation and mean reversion
as well as sensible long run variables in inverse demand function estimated as
error correction model
• Estimate for three sub-periods namely the pre-liberalisation period before
1982, the first post liberalisation cycle over 1982-1997 and the second broad
cycle over 1998-2013 and also with leveraged coefficients. Quarterly data is
used for 11 countries experiencing booms in 1980s and 2000s, namely the
UK, US, France, Canada, Italy, Spain, the Netherlands, Belgium, Ireland,
Finland and Sweden.
Panel unit root tests (IPS)
Log Real House prices (LRPH)
Log RPDI (LRPDI)
Real long rate (LRR)
Log real liabilities (LRLIABS)
Log real gross financial wealth
(LRGW)
Unemployment rate (U)
Log real housing stock (LKH)
20-39 as a share of population
(YOAD)
Level
-0.84 (0.2)
-2.7 (0.00)
-0.6 (0.27)
2.7 (0.99)
1.6 (0.94)
Difference
-9.45 (0.00)
-14.5 (0.00)
-17.7 (0.00)
-8.5 (0.00)
-13.8 (0.00)
-2.19 (0.01)
-2.44 (0.00)
-6.5 (0.00)
-10.7 (0.00)
-1.16 (0.1)
0.79 (0.78)
All
Pre 1982
House
prices
equation
for boom
countries
Log
difference of
RPDI
Difference
real long rate
Log
difference of
house prices
(-1)
Log of house
prices (-1)
Log of
RPDI(-1)
Real long
rate (-1)
Population 2039 as share of
total (-1)
Log stock of
housing (-1)
Difference of
unemployment
rate
Unemployment
rate (-1)
Log difference
of real gross
financial
wealth
Log of real
gross financial
wealth (-1)
Dummy for
banking crises
Dummy for
financial
liberalisation
Countries
Obs
Adjusted R2
SE of
regression
Durbin
Watson
Kao
1982-1997
1998-2013
0.001
(0.1)
-0.77**
(2.4)
0.25**
(2.1)
0.093
(1.2)
0.17**
(6.7)
-0.00011
(0.2)
0.25**
(3.3)
0.00099
(0.5)
0.15**
(4.0)
-0.00094
(1.0)
0.19**
(5.5)
-7.13E-05
(0.1)
0.56**
(28.1)
-0.0097**
(4.7)
-9.26E-05
(0.0)
-0.0008**
(4.0)
0.41**
(7.1)
-0.045**
(2.4)
0.078
(1.5)
-0.00071
(0.7)
0.53**
(15.7)
-0.034**
(5.5)
-0.0073
(0.5)
-0.00073*
(1.7)
0.54**
(16.6)
-0.013**
(3.0)
0.043**
(3.6)
-0.00062
(0.7)
0.032
(1.4)
-0.0054
(1.1)
-0.61*
(1.9)
0.027
(0.5)
0.12*
(1.8)
-0.037**
(2.7)
-0.081*
(1.8)
-0.031**
(3.1)
-0.0041**
(3.5)
-1.47E-05
(0.1)
-0.0077*
(1.7)
-0.00052
(0.3)
-0.0048**
(2.9)
-0.00074**
(2.3)
-0.0027**
(2.1)
-0.00054*
(1.8)
0.053**
(4.6)
0.052*
(1.6)
0.07**
(4.1)
0.038**
(2.5)
0.008**
(3.5)
-0.0032**
(2.7)
-0.00089
(1.1)
0.028**
(5.2)
-0.0034**
(2.2)
-0.014**
(2.2)
-0.0038**
(2.5)
Constant
0.00026
(0.2)
11
1612
0.5
0.16
10
275
0.38
0.02
11
687
0.53
0.16
11
650
0.6
0.011
2.13
2.09
2.09
2.11
-1.58
(0.06)*
-1.85
(0.03)**
-2.37
(0.01)**
-2.54
(0.01)**
Leveraged
coefficients
for 19821997 (in
regression
1982-2013)
CoeffIcient
T value
0.022
(0.4)
0.0015
(0.8)
-0.029
(0.6)
0.0087
(2.3)**
-0.0024
(0.8)
0.0011
(1.2)
-0.051
(1.3)
0.0031
(1.0)
-0.0048
(2.2)**
0.00041
(1.1)
0.034
(1.4)
-0.00066
(0.3)
Log difference of RPDI
Difference real long rate
Log difference of house prices (-1)
Log of house prices (-1)
Log of RPDI(-1)
Real long rate (-1)
Population 20-39 as share of total (-1)
Log stock of housing (-1)
Difference of unemployment rate
Unemployment rate (-1)
Log difference of real gross financial wealth
Log of real gross financial wealth (-1)
Extended
house price
equation,
leveraged
coefficients
for booms
Log difference of RPDI
Difference of real long
rate
Log difference of house
prices (-1)
Log of house prices (-1)
Log of RPDI(-1)
Real long rate (-1)
Population 20-39 as share
of total (-1)
Log stock of housing (-1)
Difference of
unemployment rate
Unemployment rate (-1)
Log difference of real
gross financial wealth
Log of real gross financial
wealth (-1)
Leveraged
coefficient for
period 1985q11989q4 and
2002q12006q4
Leveraged
coefficient
for period
1985q11989q4
0.10*
(1.9)
0.0036**
(2.4)
0.099**
(2.2)
0.0016
(0.6)
0.002
(0.8)
-0.00012
(0.3)
0.048*
(1.7)
-0.0025
(1.4)
0.0032
(1.0)
0.00033
(1.1)
0.014
(0.6)
-0.0018
(0.6)
0.22**
(3.3)
0.0034**
(2.0)
0.076
(1.5)
0.0047
(1.5)
-0.00089
(0.2)
-0.00048
(0.6)
0.047
(1.1)
0.00068
(0.2)
-0.0016
(0.3)
0.00047
(1.3)
0.023
(0.9)
-0.0072*
(1.7)
Leveraged
coefficient
for period
2002q12006q4
-0.083
(1.0)
0.00099
(0.3)
0.015
(0.2)
-0.015*
(1.9)
0.0041
(1.1)
-0.0023
(1.0)
0.064
(1.5)
-0.0036
(0.9)
0.0032
(0.7)
-0.00041
(0.5)
-0.0078
(0.2)
0.00091
(0.1)
House prices and mortgage supply
• Mortgage market innovations altered terms
and availability of credit, while securitisation
removes the limit of capital – less borrowing
constraints
• Should mortgage stock enter house price
equation – clear case if rationing, less so in
liberalised market as endogenous?
•
•
Lindner (2014); two alternative views of the link from asset prices to credit:
– Bernanke and Gertler (1989) and Kyotaki and Moore (1987) view that it is
asset prices that drive credit availability via changes in the net worth of
borrowers that in turn eases borrowing constraints in the presence of
asymmetric information. This is consistent with the exclusion of credit
from house price equations.
– Allen and Gale (2000) availability of credit is the more exogenous factor,
with the key influence being risk shifting by lenders and borrowers in the
presence of asymmetric information and limited liability, with consequent
moral hazard. These may in turn be facilitated by financial deregulation.
– Lindner (2014) suggests that the net worth argument is most relevant to
credit availability in general whereas risk shifting is appropriate for the
financing of a particular asset such as housing by credit so mortgage stock
is relevant.
Credit spreads and conditions versus credit stock
Panel results – boom countries – adding debt
variables
All
Proxy for log
difference of real
household debt
Log of real
household debt(1)
Pre 1982
1982-1997
1998-2013
0.092**
(11.0)
0.11**
(4.9)
0.07**
(5.5)
0.1**
(6.4)
-0.0022
(0.9)
0.0082
(0.2)
-0.0047
(0.8)
-0.0046
(0.8)
Estimation period,
1982q1 to 2013q4
Log difference of real
liabilities (proxy)
Log real liabilities (1)
Log difference of real
liabilities (proxy)
Log real liabilities (1)
Leveraged
coefficient for
period 1985q11989q4 and
2002q12006q4
Leveraged
coefficient
for period
1985q11989q4
0.033933*
(1.7)
0.000534**
(3.6)
0.027821
(1.3)
0.000706**
(3.6)
Leveraged
coefficient for
periods
1990q11994q4 and
2007q12011q4
Leveraged
coefficient
for period
1990q11994q4
0.016327
(0.7)
-9.79E-05
(0.7)
0.061461*
(1.8)
0.000331*
(1.6)
Leveraged
coefficient
for period
2002q12006q4
-0.001399
(0.1)
-0.000121
(0.7)
Leveraged
coefficient
for period
2007q12011q4
0.045496
(1.3)
-0.000159
(0.8)
1982-2013
0.088**
(9.1)
-0.004*
(1.7)
Additional distinguishing factors
• Some structural differences between the 1980s and
2000s, common to a number of countries, that could
underlie the differences and warrant further research
–
–
–
–
–
Levels of debt and the relation to inflation.
Interest rates and the impact of global liquidity.
Patterns of securitisation.
Changing patterns of owner occupation
Population density
Conclusion
•
•
•
Comparison of the booms of the 1980s and the 2000s shows a similar rise in real house prices where
booms took place, and a marked rise in the real mortgage stock along with real incomes and real financial
wealth. For the most part a similar econometric specification covers both periods.
Some differences are that leverage rose far more in the later episode and did not contract in the
aftermath. Also, the adjustment to the long run is slower in recent years, while the earlier boom period
itself showed differences with average house price behaviour which was not mirrored in the most recent
boom.
The fact that the earlier cycle is in many ways comparable to the recent one despite not provoking a
similar global financial crisis poses a challenge for the existing narrative claiming the housing boom was
the unique and key determinant of the crisis. Further research is needed on factors potentially underlying
the differences between the booms such as:
–
–
–
–
–
the initial level of debt/income and the related impact of inflation,
the impact of lower interest rates in the recent boom and global contagion via liquidity in the recent episode;
the ready availability of credit from mortgage bond issuance;
changing owner occupation rates.
evolution of population density