A bird’s eye view of OECD housing markets

2012 Financial Markets Conference

Federal Reserve Bank of Atlanta

Atlanta, 9-11 April 2012

Christophe ANDRÉ OECD Economics Department

Outline of the presentation

• Recent developments in OECD housing markets

• Drivers of supply and demand

• Housing and the wider economy

Recent developments in OECD housing markets

Real house prices Indices, 1995 =100

0

50

100

150

200

250

300

350

1970 75 80 85 90 95 2000 05 10

Ireland United Kingdom DenmarkSpain Netherlands Norway

Real house prices (cont.) Indices, 1995 =100

0

50

100

150

200

250

300

1970 75 80 85 90 95 2000 05 10

France Belgium AustraliaNew Zealand Finland Sweden

Real house prices (cont.) Indices, 1995 =100

40

60

80

100

120

140

160

180

200

1970 75 80 85 90 95 2000 05 10

United States Italy JapanGermany Canada KoreaSwitzerland

Real house prices in the US and euro area Indices, 1995 =100

40

60

80

100

120

140

160

180

1970 75 80 85 90 95 2000 05 10

United States Euro area

Real house prices in selected US states and euro area countries

Indices, 1995 =100

0

50

100

150

200

250

300

350

1975 80 85 90 95 2000 05 10

California Arizona

Nevada Florida

Spain France

Ireland

Cross-country coincidence of real house price increases

Number of countries (out of 18) with over 25% increase in real prices over the previous five years

OECD Real house prices and the business cycle

Real residential investment Indices, 1995 =100

0

50

100

150

200

250

300

350

1970 75 80 85 90 95 2000 05 10

Ireland United Kingdom Denmark

Spain Netherlands Norway

Real residential investment (cont.) Indices, 1995 =100

0

50

100

150

200

250

300

350

400

1970 75 80 85 90 95 2000 05 10

France Belgium Australia

New Zealand Finland Sweden

Real residential investment (cont.) Indices, 1995 =100

40

60

80

100

120

140

160

180

200

220

1970 75 80 85 90 95 2000 05 10

United States Italy Japan Germany

Canada Korea Switzerland

Construction in selected US states and euro area countries

Volume indices, 1997=100

80

100

120

140

160

180

200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Arizona California Florida Spain Ireland

Price-Income and Price-Rent ratios Long-term average = 100

United States United Kingdom

Germany France

60

80

100

120

140

160

180

1970 75 80 85 90 95 2000 05 1060

80

100

120

140

160

180

1970 75 80 85 90 95 2000 05 10

60

80

100

120

140

160

180

1970 75 80 85 90 95 2000 05 10

Price-Income ratio

Price-Rent ratio60

80

100

120

140

160

180

1970 75 80 85 90 95 2000 05 10

Price-Income and Price-Rent ratios (cont.) Long-term average = 100

Australia Spain

Netherlands Denmark

406080

100120140160180200220

1970 75 80 85 90 95 2000 05 10

Price-Income ratio

Price-Rent ratio406080

100120140160180200220

1970 75 80 85 90 95 2000 05 10

406080

100120140160180200220

1970 75 80 85 90 95 2000 05 10406080

100120140160180200220

1970 75 80 85 90 95 2000 05 10

Asset-pricing model Poterba (1984)

P = R / (ia + τ + f – π)

P = House prices

R = Rents

ia = After tax mortgage rate

τ = Property tax rate

f = Recurring holding costs

π = Expected capital gains

Actual and fundamental price-rent ratios Long-term average = 100

United States France

Spain United Kingdom

60

80

100

120

140

160

180

1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

Actual

Fundamental - Mortgage rates

Fundamental - Government bond rates

60

80

100

120

140

160

180

1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

60

80

100

120

140

160

180

200

1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 1160

80

100

120

140

160

180

200

1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

Different scale

Drivers of supply and demand

Drivers of demand

• Household real disposable income

• Interest rates

• Mortgage market sophistication >>>>

• Demographics

• Demand by non-residents

• Price expectations

Drivers of supply

• Profitability : House prices compared to production costs

• Expectations of future house prices

• Physical limitations to increasing supply

• Land-use and building regulations

Real house prices and residential investment Percentage change over the latest cyclical expansion

USA

JPN

DEU

FRAITA

GBRCAN

AUS

DNK

ESP

FIN

IRL

KOR

NLD

NOR

NZL

SWE

CHE

y = 0.77x - 6.90R² = 0.75

-100

-50

0

50

100

150

200

250

300

-100 -50 0 50 100 150 200 250 300 350

Residential investment

Real house prices

Housing and the wider economy

Marginal propensity to consume housing wealth and mortgage market indicators

Source: OECD Economics Department working paper, No 394 (2004).

Residential investment and private consumption - United States

Volume indices, 1991=100

80

100

120

140

160

180

200

220

240

1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

Residential investment

Private consumption

GDP

Residential investment and private consumption – Spain Volume indices, 1991=100

80

100

120

140

160

180

200

220

240

1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

Residential investment

Private consumption

GDP

Residential investment and private consumption – United Kingdom

Volume indices, 1991=100

80

100

120

140

160

180

200

220

240

1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11

Residential investment

Private consumption

GDP

The role of policies

• Loose monetary policy risks fuelling housing booms >>>>

• Regulatory and supervisory failures have often led to housing crises >>>>

• Taxation of housing often encourages homeownership and leads to higher debt levels

Tenure structure across countries Per cent of dwelling stock

Source: Andrews, Caldera Sánchez and Johansson, “Housing Markets and Structural Policies in OECD countries”, OECD Economics Department Working Papers, No. 836.

0

10

20

30

40

50

60

70

80

90

100

Owner Private rental Public rental Co-operative Others

%

Globalisation and housing

• Capital inflows associated with trade imbalances have played an important role in fuelling the boom in some countries

• The “savings glut” has contributed to keeping long-term interest rates low

Households wealth and saving in the United States

Per cent of household disposable income

-2

2

6

10

14

300

400

500

600

700

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Net household wealth (left scale) Saving ratio (right scale)

Households saving, government deficit and current account balance – United States

Per cent of GDP

-15

-10

-5

0

5

10

15

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Households savings Government net lending Current balance

Evolution of real house prices and current account balances

2000-2007

USA

JPNDEU

FRA

ITA

GBR

CAN

AUSDNK

ESP

FIN

IRL

KORNLD

NOR

NZL

SWE

CHE

-40

-20

0

20

40

60

80

100

-10 -5 0 5 10 15Change in current account balances (per cent of GDP)

Percentage change in real house prices

Conclusions • Low interest rates and mortgage market

innovations have been the main drivers of the latest housing expansion, at least initially

• After 2003-04, house prices and construction activity seem to have overshot in many countries

• Global imbalances have kept long-term interest rates low

• Inadequate financial regulation and supervision have allowed unsustainable developments in housing finance

• Tax systems favouring homeownership have tended to increase instability

Thank you !

Mortgage market sophistication and innovations

• Extension of loan terms

• Interest-only loans / Flexible repayment loans

• Increased reliance on adjustable-rates

• Higher loan-to-value ratios

• Housing equity withdrawal

• Subprime loans

• Securitisation

Risky lending in the UK Share of all regulated mortgage sales represented by high-risk

products in 2007

• 49% Non-income verified

• 32% Interest-only

• 28% Loan-to-income ratios of 3.5 or over

• 14% Loan-to-value ratios of 90% or over

• 4% To individuals with impaired credit history

Source: FSA

Loan to value ratios for housing of first time buyers in Ireland

Source: Department of environment, Heritage and Local Government.

Household debt Per cent of disposable income

0

50

100

150

200

250

300

350

400

ITA DEU FRA FIN USA JPN ESP CAN SWE GBR AUS CHE NOR IRL NLD DNK

1995 2000 2009

1995 average

2009 average2000 average

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Policy rates and Taylor rule

Per cent Per centUnited States Euro area

0

1

2

3

4

5

6

7

2000 01 02 03 04 05 06 07 08

Short-term interest rate Taylor rule

0

1

2

3

4

5

6

2000 01 02 03 04 05 06 07 08

Short-term interest rate Taylor rule

Real GDP and consumption during housing downturns

-1

0

1

2

3

4

5

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Real GDP

Real household consumption

Quarters after peak

<<<<

Regulatory and supervisory failures

• “Shadow” banking system

• Excessive leverage

• Pro-cyclicality

• Opaque securities and risk management failures

• Conflict of interest in rating agencies

• Poor underwriting standards for mortgages

• Insufficient attention to liquidity

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