dealing with housing booms and busts deniz igan, imf-research lime workshop brussels - december 8,...
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Dealing with Housing Booms and Busts
Deniz Igan, IMF-ResearchLIME Workshop
Brussels - December 8, 2012Disclaimer: Views expressed in the presentation and during the talk are those of the presenter and should not be ascribed to the IMF.
Before the crisis…
Then came the crisis…Bust had enormous
consequences
Standard policies rapidly hit their limits
Limited effectiveness of less traditional policies
Large fiscal and output costs
Need to Reconsider Consensus
Booms in housing markets are particularly dangerous
Boom, Leverage, and DefaultsBoom, Leverage, and Defaults
AUS
AUT
BGR
CAN
CHN
HRV
CYP
CZEDNK
EST
FIN
FRA
GRC
HUN
ISL
IND
IRL
ITA
KOR
LVALTU
NLD
NZL
NOR
POL
PRT
SVN
ZAFESP
SWE
CHE
UKR
GBR
USA
y = -0.0416x - 4.1152R² = 0.1496
-30
-20
-10
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10
-20 0 20 40 60 80 100 120 140 160 180 200 220 240
Cum
ulat
ive
dec
line
in G
DP
fro
m s
tart
to e
nd o
f re
cess
ion
Change in house prices f rom 2000 to 2006
Figure 2. House Price Run-Up and Severity of Crisis
Source: Claessens et al (2010).
Bubble size shows the change in bankcredit f rom 2000 to 2006.
Real Effects of House BustsReal Effects of House Busts
Leverage and Link to Crises:Current Episode
Booms, Financial Instability, Macroeconomic Performance
Followed by …
Boom systemic banking
crisis
significant drop in real GDP growth
either both
Real estate 53% 77% 87% 43%
Credit 67% 78% 93% 52%
Real estate but not credit
29% 71% 71% 29%
Credit but not real estate
100% 75% 100% 75%
Both 61% 78% 91% 48%
Neither 27% 18% 45% 0%
Bottom line
Strong association between real estate boom-busts and financial crises/recessions
Leverage is key
What to do?Monetary policyFiscal toolsMacro-prudential measures
General Points
When to take actionDeviation from yardsticks (price-income, price-rent,
leverage, credit growth)Bubbles difficult to spot but many policy decisions are
taken under such uncertainty
ObjectivesPrevent unsustainable booms and leverage buildupIncrease resilience to busts
No silver bulletBroader measures: hard to circumvent but more costlyTargeted tools: limited costs but challenged by loopholes
Monetary Policy
Fiscal Tools
Macro-Prudential Tools
Most ‘experiments’ in emerging markets, particularly Asia
Common tools: Maximum LTV/DTI limitsDifferentiated risk weights on high-LTV loansDynamic provisioning
Discretion rather than rule-based
Mixed evidence on effectiveness
Could macro-prudential tools have prevented crisis in EuroZone?Greece and (to lesser extent) Portugal classic
fiscally driven crises:Large fiscal deficitsRelatively low growth (and very low productivity growth)Large current account deficits
But Spain, Ireland, Latvia differentPrudent fiscal (at time of crisis, plenty of fiscal room)But buoyant private sectorAsset price bubbles and credit boomsLarge current account deficits (especially Spain/Latvia)
Common currency a constraint for all
Spain: Cannot stop a herd, but…Dynamic provisioning in place since July 2000
Housing demand shock (immigration and foreign investors): Rapid growth in prices and credit Construction boomLack of monetary/ER instruments
Bubble burst in 2007: Dynamic provisions accounting on average for 10% of net
operating income of banksTotal accumulated provisions cover 1.3% of consolidated
assets while capital and reserves stand at 5.8%, providing some buffer
Tentative Lessons
Ensuring financial resilience and avoiding boom-bust cycles are not mutually exclusive
Macro-prudential policy still in its infancy
Pragmatic and discretionary, mobilized within existing institutional frameworks, targeted at specific markets
Some evidence of temporary cooling effect on markets and building enough buffers for bad times
Too early to judge impact on aggregate cycles and interaction with other policies
Tentative Policy Taxonomy
Macro-prudential tools first line of defenseTarget leverageStrengthen balance sheets
Monetary policy definitely to be involved when there are other signs of overheating
Fiscal tools hard to use cyclicallyBut removing distortions may help at the structural level
Important Open Questions
Who does what?Where should macro-prudential authority reside?
Relationship among policiesTo what extent are these independent tools?
Rules versus discretionFar away from IT standardsRisks associated with excessively interventionist policyChallenges from political economy perspectivePreventing circumvention and risk shifting
Hong Kong: Limited effectiveness of LTV limits
110
120
130
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160
70
90
110
130
150
170
2009 - Mar 2009 - May 2009 - Jul 2009 - Sep 2009 - Nov 2010 - Jan 2010 - Mar 2010 - May 2010 - Jul
New loans approved Prices
October 2009:Maximum LTV for properties over HK$20 million lowered to 60 percent, maximum loan size for mortgage insurance eligibility reduced and non-owner-occupied properties disqualified.
August 2010:LTV for properties over HK$12 million lowered to 60 percent, applications for mortgage insurance exceeding 90% LTV and 50% DTI suspended, maximum loan size for mortgage insurance eligibility if LTV>90%.
Korea: Effective LTV limits, but difficult calibration?
0
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3
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5
6
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2000 - Jan 2001 - Apr 2002 - Jul 2003 - Oct 2005 - Jan 2006 - Apr 2007 - Jul 2008 - Oct 2010 - Jan
September 2002:Introduced LTV limits
June 2003:Lowered LTV in speculative areas
October 2003:Lowered LTV in speculative areas
July 2009:Lowered LTV in non-speculative areas
February 2007:Tightened DTI
August 2005:Introduced DTI limits
September 2009:Tightened DTI
Month-on-month house price changes in 'speculation zones' (LHS)
Policy rate (RHS)