Crises of confidence turn booms into busts. Bloated household balance sheets and high debt offer the right ingredients for a confidence-driven housing bust. This column develops an analytic framework that accommodates the potential role of confidence fluctuations as a source of uncertainty in the economy. Current debt levels are shown to determine the exposure to crises of confidence. The results point to a clear role for macroprudential policy in the prevention of such crises.
Thomas Hintermaier, Winfried Koeniger, 09 January 2016
Rachel Ngai, Kevin D Sheedy, 06 October 2015
The housing market is important for many developed economies, not least in the UK. This column presents new research in search and matching modelling suggesting that the quality of a house-buying match is important in understanding not only the time taken to sell a house, but also the length of time homeowners will live in the new house before their next move. The research should provide economists with new insights into housing market dynamics.
Sumit Agarwal, Gene Amromin, Souphala Chomsisengphet, Tomasz Piskorski, Amit Seru, Vincent Yao, 01 October 2015
Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. The authors provide comprehensive evidence that competitive frictions in intermediation sector prevented a large number of such eligible borrowers from benefiting from the programme. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the programme could increase overall consumption and alleviate uneven economic outcomes across the country.
Nicola Borri, Pietro Reichlin, 08 September 2015
Some argue that the increasing wealth-to-income ratios observed in many advanced economies are determined by housing and capital gains. This column considers the growing wealth-to-income ratio in an economy where capital and labour are used in two sectors: construction and manufacturing. If productivity in manufacturing grows faster than in construction – a ‘housing cost disease’ – it has adverse effects on social welfare. Concretely, the higher the appreciation of the value of housing, the lower the welfare benefit of a rising labour efficiency in manufacturing.
Kenneth N. Kuttner, Ilhyock Shim, 13 June 2015
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.
Espen R. Moen, Plamen Nenov, Florian Sniekers, 15 February 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, 03 November 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, 01 November 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, 30 June 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, 21 May 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, 09 February 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, 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.
Yuming Fu, Wenlan Qian, Bernard Yeung, 07 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.
Balázs Égert, Rafał Kierzenkowski, 02 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.
Joshua Aizenman, Yothin Jinjarak, 02 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.
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?
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.
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.
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.
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.