Monetary policy and long-term trends
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.
There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within 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 (leverage).
Financial markets Macroeconomic policy Monetary policy
monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy
Home prices since 1870: No price like home
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.
For economists there is no price like home – at least not since the global financial crisis. Fluctuations in house prices, their impact on the balance sheets of consumers and banks, as well as the deleveraging pressures triggered by house price busts have been a major focus of macroeconomic research in recent years (Mian and Sufi 2014, Jordà et al. 2014, Shiller 2009).
Economic history Financial markets
housing, house prices, global crisis, land prices, transport costs, transport revolution, land-use restrictions, zoning laws, Inequality
Capital is not back: A comment on Thomas Piketty’s ‘Capital in the 21st Century’
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.
The impressive success of Thomas Piketty’s book (Piketty 2014) shows that inequality is a great concern in most countries. His claim that “capital is back”, because the ratio of capital over income is returning to the levels of the end of the 19th century, is probably one of the most striking conclusions of his 700 pages. Acknowledging the considerable interest of this book and the effort it represents, we nevertheless think this conclusion is wrong, due to the particular way capital is measured in national accounts.
house prices, housing, Inequality, rents, housing bubble, capital, wealth inequality
The housing-market impacts of shale-gas development
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.
Technological improvements in the extraction of natural gas from shale rock have transformed the industry.
house prices, housing, externalities, pollution, property prices, shale gas, fracking
Does homeownership influence stockholding?
Denis Fougère, Mathilde Poulhès 01 December 2012
Faltering housing markets have been central in exacerbating the global crisis and in prolonging its lacklustre recovery. This column warns that similar troubles may lie ahead. In examining the complex interactions between housing investments and stock market investments, evidence suggests that an increase in housing values reduces equity holdings. This correlation is important, and potentially problematic, because housing values are currently creeping back towards pre-crisis levels in many Western economies.
The influence of homeownership on portfolio choice is a complex issue because housing is both an investment good and a consumption good. That said, a deeper analysis of the influence of homeownership is crucial, at least if we consider the recent high fluctuations in the housing market and the substantial increase in mortgage debt both in the US and some European countries.
Distinguishing between mortgage debt effect and home equity effect
The debate on the influence of homeownership on households’ portfolios is, first, a debate between theory and empirics.
house prices, mortgages, home equity
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.
inflation, house prices, housing
On the Chinese house-price bubble
Christian Dreger, Yanqun Zhang 15 July 2011
For a while now, analysts have been arguing there is a bubble in China’s property market. Using records from 35 major cities this column finds evidence of a housing bubble. It compares house prices to cointegrated fundamentals and finds that property in China is in general overvalued by around 20% – and even more so in the boom towns.
For many observers, the Chinese economy has been spurred by a bubble in the real-estate market, probably driven by the fiscal stimulus package and massive credit expansion (Nicolas 2009). For example, the stock of loans increased by more than 50% since the end of 2008.
house prices, China, Property market
Low interest rates and housing booms: The role of capital inflows, monetary policy, and financial innovation
Filipa Sá, Pascal Towbin, Tomasz Wieladek 10 March 2011
In much of the Western world, the decade prior to the global crisis witnessed soaring house prices. While the debate on its causes continues, this column finds that the property booms owed a significant part of their ferocity to large capital inflows and low interest rates.
The run-up to the recent global financial crisis was characterised by an environment of low interest rates and a rapid increase in housing market activity across OECD countries.
International finance Macroeconomic policy Monetary policy
interest rates, house prices, Capital inflows, real estate
Foreclosures, house prices, and the real economy
Atif Mian, Francesco Trebbi, Amir Sufi 10 February 2011
Several academics, policymakers, and regulators emphasise the role of foreclosures in the Great Recession and subsequent global crisis. This column provides one of the first attempts to show this empirically. Using micro-level data from all US states, it shows that foreclosures had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy.
How does a negative shock to the economy get amplified into a severe and long-lasting economic slump? The answer may be found in your house. An extensive body of theoretical research shows that the forced sale of durable goods – in many cases a house – can have two undesirable consequences. First, the price of these goods is driven down. Second, these negative price effects can lead to a significant decline in real economic activity (see for example Shleifer and Vishny 1992, Kiyotaki and Moore 1997, Krishnamurthy 2009, Lorenzoni 2008, and Shleifer and Vishny 2010 for a recent discussion).
Global crisis Macroeconomic policy
US, house prices, subprime crisis, global crisis, foreclosures
Household debt and macroeconomic fluctuations
Amir Sufi, Atif Mian 29 April 2010
US Congressional committees are now grilling bankers on the complex instruments that provided subprime mortgages with a veil of security. This column presents new evidence that subprime mortgages had more serious consequences – they were a key factor in the US housing-price boom. When house prices faltered, subprime mortgage holders defaulted en masse, eventually leading to the global crisis.
There once was a decade in US history in which financial innovation led to a sharp rise in the flow of credit to households. Durable goods consumption increased dramatically as household debt climbed to over 100% of GDP. The subsequent economic downturn was tragic, and the severity of the malaise was closely related to the preceding rise in household leverage (see Eichengreen and Michener 2003, Mishkin 1978, and the chart from David Beim at npr.org).
house prices, Subprime, global crisis