The housing market, almost everywhere, is a major source of financial instability. This column presents research suggesting that certain types of macroprudential policy may well be useful additions to the policy toolbox, but that the evidence is far from definitive. Despite promising signs, it would be unwise to rely solely on macroprudential policies for taming financial booms and busts.
Kenneth N. Kuttner, Ilhyock Shim, Saturday, June 13, 2015
Espen R. Moen, Plamen Nenov, Florian Sniekers, Sunday, February 15, 2015
Search frictions are important for understanding the housing market volatility. This column shows not only that the optimal order of buying and selling depends on housing market conditions but that it also affects these conditions. This feedback leads to multiple equilibria and to fluctuations in transaction volume, average time on market, and house prices.
Charles A.E. Goodhart, Philipp Erfurth, Monday, November 3, 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
Katharina Knoll, Moritz Schularick, Thomas Steger, Saturday, November 1, 2014
House price fluctuations take centre stage in recent macroeconomic debates, but little is known about their long-run evolution. This column presents new house price indices for 14 advanced economies since 1870. Real house prices display a pronounced hockey-stick pattern over the past 140 years. They stayed constant from the 19th to the mid-20th century, but rose strongly in the second half of the 20th century. Sharply increasing land prices, not construction costs, were the key driver of this trend.
Odran Bonnet, Pierre-Henri Bono, Guillaume Camille Chapelle, Étienne Wasmer, Monday, June 30, 2014
Thomas Piketty’s claim that the ratio of capital to national income is approaching 19th-century levels has fuelled the debate over inequality. This column argues that Piketty’s claim rests on the recent increase in the price of housing. Other forms of capital are, relative to income, at much lower levels than they were a century ago. Moreover, it is rents – not house prices – that should matter for the dynamics of wealth inequality, and rents have been stable as a proportion of national income in many countries.
Mark R. Rosenzweig, Junsen Zhang, Wednesday, May 21, 2014
Household savings in China are high by international standards, and the young save as much or more than the middle-aged – a fact at odds with the standard life-cycle savings model. This column argues that neither old-age support by the middle-aged nor the one-child policy can satisfactorily explain this phenomenon. Rather, currently high housing costs and the prevalence of inter-generational shared housing are key reasons for the higher savings rates of the urban young in China.
Lucija Muehlenbachs, Beia Spiller, Christopher Timmins, Sunday, February 9, 2014
Compared to coal and oil, shale gas offers the prospect of greater energy independence and lower emissions of carbon dioxide and other pollutants. However, fracking is controversial due to the local externalities it creates – particularly because of the potential for groundwater contamination. This column presents evidence on the size of these externalities from a recent study of house prices. The effect attributable to groundwater contamination risk varies from 10% to 22% of the value of the house, depending on its distance from the shale gas well.
Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay, Monday, November 25, 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.
Yuming Fu, Wenlan Qian, Bernard Yeung, Thursday, November 7, 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.
Balázs Égert, Rafał Kierzenkowski, Wednesday, October 2, 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.
Joshua Aizenman, Yothin Jinjarak, Tuesday, July 2, 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.
Nicholas Crafts, Sunday, May 12, 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?
Ing-Haw Cheng, Sahil Raina, Wei Xiong, Thursday, April 11, 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.
Frédéric Robert-Nicoud, Christian Hilber, Monday, March 18, 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.
Thomas Alexander Stephens, Jean-Robert Tyran, Friday, November 23, 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.
Joshua Aizenman, Ilan Noy, Saturday, August 25, 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.
Agar Brugiavini, Viola Angelini, Guglielmo Weber, Monday, March 12, 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.
Thomas Philippon, Virgiliu Midrigan, Monday, May 16, 2011
In the recent US recession, those states which saw the biggest increases in household leverage during the credit boom suffered greatest hits to output and employment rates. The authors of CEPR DP 8381 try to understand this anomaly with a new model of a cash-in-advance economy, where economic activity is highly sensitive to credit conditions. They argue that this framework supports the use of expansionary monetary policy to mitigate recessions.
Leah Boustan, Robert A Margo, Saturday, February 12, 2011
Economists and sociologists have long maintained that mass movement of whites to US suburbs harmed remaining inner city residents by reducing the tax base and fostering isolated racial enclaves. This column argues that white suburbanisation had a silver lining – it indirectly contributed to the rise in black homeownership.
Stephen Cecchetti, Wednesday, June 13, 2007
With inflation targets winning the world of Central Banking, methods for measuring inflation have direct policy consequences. The big question for inflation measurement is how to handle housing. The US methods are better than the ECB methods.