During financial crises, fire sales (or forced asset sales) could further aggravate the financial fragility. However, evidence on why agents do not take actions to avoid collateral liquidation is scant. This column uses data on foreclosures and house prices from the US housing crisis to present new evidence on the issue. The authors argue that lenders with a large share of outstanding mortgages internalise the negative spillovers of liquidation. Thus, they might be more likely to renegotiate and avoid price-default spirals.
Giovanni Favara, Mariassunta Giannetti , 24 April 2015
Alejandro Justiniano, Giorgio Primiceri, Andrea Tambalotti, 27 February 2015
There is no consensus among economists on the forces that drove the historical rise of US house prices and household debt that preceded the Global Crisis. In this column, the authors argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit. This rise was brought about by the diffusion of securitisation and shadow banking, and by a surge in foreign capital inflows. The finding is based on a straightforward interpretation of four key macroeconomic developments between 2000 and 2006, provided by a simple general equilibrium model of housing and credit.
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.
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.
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.
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.
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.
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.
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.
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.
Sergi Jiménez-Martín, Hugo Benítez-Silva, Selcuk Eren, Frank Heiland , 30 June 2009
How did we get a housing bubble? This column describes how well households predict the market values of their homes. Most homeowners overestimate the value of their properties by 5% to 10%, primarily due to the large expected capital gains implicit in the self-reported home values. Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US.
Tommaso Monacelli, Roberto Cardarelli, Alessandro Rebucci, Luca Sala, 26 April 2008
Recent housing finance innovations have changed the relationship between house prices and the business cycle. This column suggests that these changes amplify spillovers from the housing sector to the rest of the economy and recommends that monetary policy respond more aggressively to the housing market.
Daniel Gros, 25 October 2007
Euro-area housing prices have risen almost as much as those of the US. For decades, euro-area housing prices have followed those of the US quite closely. Are Euro-area housing prices headed for a slump?
Dennis J Snower, 28 September 2007
Economists can’t say: “we told you so.” Economists don’t have perfect foresight. But like doctors after the outbreak of a contagious disease – economists can tell you how the disease might spread, so that you may be better prepared. Here are some of the possible dangers ahead.
Tommaso Monacelli, 31 August 2007
The public is overreacting to the current turmoil in financial markets. The turmoil is most likely a situation where very specific problems are spread out extensively across investors and countries and thus the defaults are benign.
Stephen Cecchetti, 01 December 2004
Written December 2004: Governments should use regulatory policies to address equity and property price bubbles, leaving interest rates to pursue more traditional policy goals. But until the efficacy of alternatives is proven, interest rates are the only tool and the right response to emerging equity or property price bubbles is to raise interest rates.