Dark side of housing-price appreciation
Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay, 25 November 2013
Higher asset prices increase the value of firms’ collateral, strengthen banks’ balance sheets, and increase households’ wealth. These considerations perhaps motivated the Federal Reserve’s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.
Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.
Topics: Financial markets, Monetary policy
Tags: asset prices, banks, Federal Reserve, housing, investment, lending, real estate
Speculative investors and transaction tax in the housing market
Yuming Fu, Wenlan Qian, Bernard Yeung, 7 November 2013
Financial transaction taxes are designed to raise revenue and stabilise financial markets, but their effect on market volatility is controversial. This column presents evidence from the sudden reintroduction of stamp duty on new housing projects in Singapore. Overall trading volume declined while volatility increased. These effects were strongest for previously underpriced projects, consistent with the hypothesis that informed speculators were more strongly discouraged by the tax than noise traders. This suggests that financial transaction taxes may reduce the informativeness of asset prices.
The Global Financial Crisis revived the idea of using transaction taxes to discourage short-term speculative trades. Such trading is often blamed for causing excess volatility in financial markets. Tobin (1978) proposed the tax more than 40 years ago, to “throw some sand in the wheels of speculation”, specifically for currency trading.
Topics: Financial markets
Tags: asset prices, financial transaction tax, housing, Singapore, stamp duty
Exports and property prices: Are they connected?
Balázs Égert, Rafał Kierzenkowski, 2 October 2013
Decreasing world market share in exports threatens France’s recovery. Traditional determinants of exports do not fully explain the downturn. This paper presents a novel explanation for France’s declining exports: the real-estate boom. Strong profitability in the construction industry, led by rising house prices, diverted capital and labour from export-intensive industries. These results suggest a strong warning against policies supporting property ownership as an end in itself.
A marked decline in France’s export-market shares
Topics: Europe's nations and regions, International trade
Tags: exports, France, housing, real estate
Real-estate valuation, current-account and credit growth patterns, before and after the 2008-09 Crisis
Joshua Aizenman, Yothin Jinjarak, 2 July 2013
The Global Crisis sparked a vibrant debate about what factors were to blame. This column addresses one of the core questions of this debate: are global imbalances or excessive credit growth key suspects? Presenting new research, it’s clear that the painful adjustment in the real-estate markets of the US, Spain and other affected countries in the aftermath of the Crisis, and the key importance of momentum effects, call for further research on policies that can mitigate possible bubble-dynamics.
The Global Crisis sparked a vibrant debate about what factors contributed to the Crisis. One question remains central to the debate:
Topics: Global crisis
Tags: credit growth, housing, real estate
Escaping liquidity traps: Lessons from the UK’s 1930s escape
Nicholas Crafts, 12 May 2013
The UK escaped a liquidity trap in the 1930s and enjoyed a strong economic recovery. This column argues that what drove this recovery was ‘unconventional’ monetary policy implemented not by the Bank of England but by the Treasury. Thus, Neville Chamberlain was an early proponent of ‘Abenomics’. This raises the question: is inflation targeting by an independent central bank appropriate at a time of very low nominal-interest rates?
In mid-1932, the UK had experienced a recession of a similar magnitude to that of 2008-09, was engaged in fiscal consolidation that reduced the structural budget deficit by about 4% of GDP, had short-term interest rates that were close to zero, and was in a double-dip recession (Crafts and Fearon 2013).
Topics: Europe's nations and regions
Tags: Britain, Eurozone crisis, house building, housing, UK
Distorted beliefs and the financial sector
Ing-Haw Cheng, Sahil Raina, Wei Xiong, 11 April 2013
The subprime crisis narrative focuses on incentives: ‘they knew it was risky, but didn’t care’. This column argues in favour of a more nuanced explanation, that distorted beliefs also mattered. An analysis of personal home transactions by mid-level managers in the mortgage-securitisation business shows that they increased their personal housing exposure during the boom. ‘Groupthink’ and distorted beliefs in the financial sector is something to take seriously if we want to prevent future crises.
What led Wall Street to take excessive risks in the housing market before the 2008 financial crisis?
Topics: International finance
Tags: cognitive dissonance, housing, Subprime
On the causes and consequences of land use regulations
Frédéric Robert-Nicoud, Christian Hilber, 18 March 2013
Zoning policies and land use regulations are widespread. This column presents recent research suggesting that regulations have in fact gone too far. Land use regulation is the outcome of competing property owner and land developer pressure groups, and it seems that local authorities respond well to lobbying, in addition to more traditional welfare and electoral considerations. The most over-restrictive regulation is in highly desirable places, New York and San Francisco being some of the worst offenders.
Land use regulations vary tremendously in shape and scope across space and have become more widespread and stringent over time. Although land use regulations have a long history dating back to at least the 17th century, they were initially pro-growth (McLaughin 2012). Even a century back, hardly any countries systematically regulated land use in a restrictive manner.
Topics: Industrial organisation
Tags: housing, regulation
Why is housing such a popular investment? A new psychological explanation
Thomas Alexander Stephens, Jean-Robert Tyran, 23 November 2012
Despite its meagre real returns in the long run, many people still think that investing in housing is a good idea. This column argues that a major reason for the tendency to buy houses is that it’s rare to lose money. Recent research shows people’s perceptions of housing transactions to be shaped by whether they gain or lose money – above and beyond the real returns.
In the wake of the economic crisis that began in 2007, homeowners in many countries have faced substantial losses. Prices have fallen in both nominal and real terms. In the US, for example, house prices in the first quarter of 2012 were down more than 40% in real terms from their peak (Shiller 2012). Nevertheless, housing remains a popular investment1.
Topics: Global economy
Tags: house prices, housing, inflation
Reflections on the curious contrast of public policies between Germany and the US: Real estate versus human capital
Joshua Aizenman, Ilan Noy, 25 August 2012
In the years leading up to the global crisis, the US focused on subsidising home ownership, whereas Germany placed much more emphasis on education and vocational training. While it is easy to think that this explains the subsequent performance of the two economies, this column provides some much needed economic analysis.
During the years leading to the global crisis, the US and Germany were the dominant growth poles in the Americas and Europe, respectively (ADD CITE). Their position reflected their growth performance and their dominant size.
Topics: Education, Global crisis, Macroeconomic policy
Tags: education, Germany, global crisis, housing, subprime crisis, US
The dynamics of homeownership among the 50+ in Europe
Agar Brugiavini, Viola Angelini, Guglielmo Weber, 12 March 2012
In January the UK government launched an initiative to help the elderly downsize into smaller homes – and provoked the ire of pensioner groups nationwide. This reluctance to downsize to among the elderly perplexes economists, who maintain that leveraging housing wealth can help pensioners maintain a good standard of living on a fixed income. CEPR DP8889 investigates what is behind European pensioners’ puzzling housing decisions.
Vox readers can download CEPR Discussion Paper 8889 for free here.
Journalists are entitled to free DP downloads on request; please contact email@example.com. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.
Topics: Europe's nations and regions, Poverty and income inequality, Welfare state and social Europe
Tags: housing, life events, Retirement