Academic journal article National Institute Economic Review

Comparing Housing Booms and Mortgage Supply in the Major OECD Countries

Academic journal article National Institute Economic Review

Comparing Housing Booms and Mortgage Supply in the Major OECD Countries

Article excerpt

Introduction

The house price and lending boom of the 2000s is widely considered to be not only a unique event but also the main cause of the global financial crisis that began in 2007, leading in turn to the biggest losses in financial wealth for generations (IMF, 2008a; Kemme and Roy, 2012). Typical of current thinking is a speech earlier this year by Min Zhu, Deputy Managing Director of the IMF, who said "housing is an essential sector of the economy but also one that has been the source of vulnerabilities and crises" (our italics). However, looking to the past, we find a similar global housing boom in the late 1980s which did not lead directly to a global systemic banking crisis there were widespread banking difficulties in the early 1990s but these were linked mainly to commercial property exposures (Davis, 1995). This raises the question whether the received wisdom is incorrect, and other factors than the housing boom caused the crisis, while macroprudential policy is wrongly targeted at the control of house prices and lending per se.

Accordingly, in this paper we compare the cycles and assess the evolution in house price determination in major OECD countries over the past decades to see whether the current cycle is unique. A key point in this context is that housing differs from other asset markets in that informational reasons, transaction costs, credit rationing and supply side factors help explain serial correlation and mean reversion in house prices which may in turn differ across countries and time but may also lead to common patterns in global markets (Capozza et al., 2002).

In terms of a comparison, we may ask whether the booms were similar in key features apart from rising house prices, or were there major contrasts? We explore these questions via a statistical comparison of roughly-defined boom periods as well as the 'aftermath' of the booms. (1) We go on to assess whether there have been changes in the relationship of house prices to their determinants more generally in the two main housing cycles since liberalisation, which in most OECD countries happened in the 1980s. (2) Furthermore, it is a stylised fact that mortgage debt should not have a direct influence on house prices in a liberalised financial market such as characterised both the recent boom periods (since mortgage debt is then demand-determined). We examine econometrically whether this was the case for the booms in question. Finally we consider other unique factors that may distinguish the recent boom better than house price and lending dynamics per se.

The paper is structured as follows. In the first section, we compare housing booms and assess in particular the changes in real house prices and their main determinants, notably real personal disposable income (RPDI) and real housing debt in fifteen major OECD countries. In the second section we briefly introduce work underlying house price equations before providing a specification for house price determination (similar to Davis, Fic and Karim, 2011) in the third section and results in the fourth. In the fifth section we look specifically at results for the impact of credit supply on house prices, which is omitted by most extant specifications and in the sixth we look at potential structural and conjunctural factors that may distinguish the booms. The final section concludes.

I. Comparing global housing cycles

We have quarterly data on house prices and other relevant macroeconomic and financial variables covering both boom periods for fifteen OECD countries, drawn from the BIS database. We define the booms roughly as five year periods from 1985Q1-1989Q4 and 2002Q1-2006Q4, in line with Dokko et al. (2011) of the Fed and incorporating the periods that Igan and Foungini (2012) of the IMF show for country-by country specific data on house price cycles. (3) We also define an 'aftermath' period for each boom which is the following five years, namely 1990Q1-94Q4 and 2007Q1-11Q4. …

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