Monday, July 27, 2015

On the Globalization of Real Estate and its Consequences

Speech delivered by Prakash Loungani
Advisor, Research Department at the IMF
2015 Global Real Estate Summit in Washington DC
July 8, 2015

Good afternoon. I am grateful to Professor Ko Wang of Johns Hopkins University for putting together this plenary session. And I welcome the many real estate associations—including the Global Chinese Real Estate Congress—that have come together to make this a truly unique event.

My remarks will focus on one aspect of the globalization of real estate markets, namely the role of foreign investors. We see frequent discussions of this in the media. For example, here is a recent column by Zoe Williams of The Guardian (Slide 2).


  • She complains that UK house prices—in London but also elsewhere—are “far beyond what people can afford” and that this is partly because houses are “going straight to mainly Asian investors”. 

  • She worries that “when anybody from anywhere can buy a flat in your city, sooner or later the people who live and work in it won’t be able to afford to” and proposes the simple solution that the UK “ban the ownership of housing by foreign non-residents”. 

What do we know about the role that foreign investors are playing in real estate markets? Anecdotally, there is indeed an increased role of foreign investors. It appears to be driven by three factors.
  • First, there has been an immense increase in wealth, particularly in emerging market economies.
  • Second, interest rates area at historical lows around much of the world, prompting a search for yield among other investments.
  • Third, in a few cases, increased geo-political risks are leading to safe haven flows to particular property markets. For instance, some research shows that has house price increases in London are correlated with increased political risk, which the authors argue drives capital inflows into real estate markets. 

US Housing Market: An Update

From the Global Housing Watch Newsletter: July 2015

Below is a snapshot of what the experts are saying about the different issues of the US housing market. 

Mortgage, fed funds rate, and access to credit. If you are thinking about taking out a mortgage, don’t obsess over the Fed—that’s the advice of Neil Irwin of the New York Times. Irwin says: “(…) even the most knowledgeable people about Fed policy get it wrong. I know of a guy whose insights into the Fed are better than almost anybody else’s. He refinanced his mortgage on a house in Washington in 2011, getting a 30-year fixed-rate mortgage at 4.25 percent. He should have waited a year. By late 2012, average rates were almost a full percentage point lower. But by then Ben Bernanke was stuck with his higher mortgage rate, and, presumably, a bit of regret.” On a separate note, Robert Shiller reminds us that the housing still isn’t rational (New York Times). On fed funds rate, in a recent remarks, Federal Reserve Chairwoman Janet Yellen signaled that the Fed is likely to raise its policy rate this year, assuming its forecasts for stronger growth and lower unemployment are realized. In contrast, an IMF report says that the Fed should delay policy rate rise until 2016. And on access to credit, the Urban Institute points out that access to credit is slowly increasing after years of post-crisis restriction.


Housing finance. “While a number of important steps have been taken to address the structural weaknesses exposed by the crisis in mortgage markets, comprehensive housing finance reform remains the largest piece of unfinished business. In particular, it is not clear when Fannie Mae and Freddie Mac will exit conservatorship and what an end point for a reformed housing finance system will look like. This creates not only fiscal but also financial risks: moral hazard from coverage of credit losses by the government or the government-sponsored enterprises, a distorted competitive landscape due to the dominant footprint of Fannie Mae and Freddie Mac, and large subsidies for homeownership that create incentives to take on excessive levels of household debt,” according to Deniz Igan of the IMF. 

Housing market activity. On the demand front, Redfin’s new Housing Demand Index rose 13 percent in June compared to last year. Currently, the national breakeven horizon on a typical home for buyers making the median income is a little less than two years, according to Zillow. On the supply front, there is a general consensus that housing supply is tight. Bidding wars are making a comeback in a number of metro areas across the US due to a market short of homes for sale, notes the Wall Street Journal. Moreover, the lack of supply varies across the different segments. An acute lack of construction at the lower end of the housing market is creating a tight supply, driving up rents and pushing up prices of affordable homes to levels reached in 2006, says the Financial Times. On the sentiment front, home builders recently reported their highest level of satisfaction with the real estate market since 2005 (NAHB). 

A new long-term housing equilibrium. According to an IMF report: “Up until recently, household formation has been depressed despite the potential for pent-up demand from demographics and more secure job prospects. The slow return of millennials to the first-time home buyers market could signal a preference shift away from traditional suburban, owner-occupied housing. Indeed, the urban rental market remains strong which could represent an enduring increase in demand for multi-family housing units with a smaller square footage. If true, this would permanently lower the steady state growth contribution from residential construction. A less concerning interpretation comes from household surveys, which suggest that attitudes to home ownership haven’t changed much: most renters would prefer to own if they had the necessary financial resources. If that were true, once the job market improves further and millennials have paid off some of their student loans (which have grown to over US$1 trillion or 7½ percent of GDP), the demand for housing could quickly revert to previous norms, with an accompanying step-up in residential investment.”



Rental market. The single-family rental market has enjoyed a strong run due to the foreclosure crisis and declining homeownership, according to Mark Zandi and Adam Kamins (both at Moody’s Analytics). In the long run, the rental market is also likely to remain strong. While the millennial generation born after 1980 has driven demand for apartments in recent years, baby boomers -- those born from 1946 to 1964 -- will be the next wave, pushing up rents and spurring construction of more multifamily housing, according to Jordan Rappaport (Federal Reserve Bank of Kansas City). There is also anecdotal evidence that developers are building few new units as demand is hit by post-crisis rules on condo mortgages (Wall Street Journal). 

Debate on the causes of the recent housing crash continues. New research has focused on the reported income for mortgage loans (income reported in mortgage applications vs. income reported on tax returns). A second study from Manuel Adelino, Antoinette Schoar, and Felipe Severino finds that the results in the first study are not driven by fraudulent income overstatement as argued by Mian and Sufi. Adelino, Schoar, and Severino’s new paper show that there was no decoupling of mortgage growth from income growth at origination over the 2002 to 2006 period. Instead, their results document that mortgage debt at origination grew proportionally across the income distribution, and especially middle- and high-income and borrowers with a FICO score above 660 represented a larger share of defaults once the crisis hit. These results are hard to reconcile with the earlier view of the crisis that unprecedented levels of lending to low income and low credit score neighborhoods set off the crisis.

Thursday, July 23, 2015

House Prices in Czech Republic

"(...) real estate prices continue their mild recovery", says IMF report on Czech Republic.


House Prices in Japan

"Land and real estate prices have bottomed out in most market segments and condominium prices in metropolitan areas are rising again after a two-decade slump," notes the IMF report on Japan.


Monday, July 20, 2015

LTV and DTI Limits—Going Granular

A new IMF paper by Luis I. Jácome and Srobona Mitra looks at how loan-to-value (LTV) and debt-service-to-income (DTI) limits work in practice (Brazil, Hong Kong SAR, Korea, Malaysia, Poland, and Romania). The authors find that "(...) rapid growth in high-LTV loans with long maturities or in the number of borrowers with multiple mortgages can be signs of build up in systemic risk; monitoring nonperforming loans by loan characteristics can help in calibrating changes in the LTV and DTI limits; as leakages are almost inevitable, countries strive to address them at an early stage; and, in most cases, LTVs and DTIs were effective in reducing loan-growth and improving debt-servicing performances of borrowers, but not always in curbing house price growth."