Mortgage contracts in a general equilibrium model when there are inflation shocks

This paper examines the general equilibrium effects of anticipated and unanticipated inflation shocks when an asset such as housing is financed by long-term contracts. Unlike other analyses of housing and mortgage finance, this model specifies that financial markets are fully integrated. Within a simple three-period overlapping generations model, agents obtain a mortgage in the first period and maximize utility under the constraint that no borrowing for consumption is allowed. Following inflation shocks, transition paths of endogenous interest rates, house prices, and welfare can be traced in simulations of the economy under the assumption of rational expectations. When nominal contracts prevail, an unexpected increase in the inflation rate causes a decline in the real rate of interest, owing to adjustments in the loanable funds market. Thus, real effects emerge even in the absence of tax distortions or explicit modelling of uncertainty. I contrast these real effects, given loans in the form of adjustable rate mortgages, with the absence of such effects when loans are price-level-adjusted mortgages.     

HOUSING AND THE BUSINESS CYCLE*

In the United States, the percentage standard deviation of residential investment is more than twice that of nonresidential investment. In addition, GDP, consumption, and both types of investment co‐move positively. We reproduce these facts in a calibrated multisector growth model where construction, manufacturing, and services are combined, in different proportions, to produce consumption, business investment, and residential structures. New housing requires land in addition to new structures. The model can also account for important features of industry‐level data. In particular, hours and output in all industries are positively correlated, and are most volatile in construction.     

The Equity of Alternative Policies for the Australian Homeowner*

The income-tax treatment of homeowners and renters is an important instrument of national housing policy. Major changes in the treatment of homeowners occurred in 1975 and 1976; the second change focused especially on the problems of first-buyers and was coincident with an expanded home-savings grant scheme. As a further reform several writers have advocated the taxation of the rent imputed to homeowners. This paper develops a user cost of capital approach to estimate the distribution of housing costs along the income scale and between policy alternatives. The model indicates the vital importance of accounting for inflation whenever physical housing costs are inflating but mortgage costs are fixed in nominal terms. Although inflation is increasing housing costs at all income levels, high-income homeowners appear to be suffering the greatest cost increases as the result of inflation. Furthermore, unless mortgages are indexed, the customary imputed-rent formula is regressive.     

DISINFLATION AND HOUSING INVESTMENT: A REVISIOIIIST ANALYSIS

The pattern of housing investment through the Seventies was a product of high and variable rates of inflation, a financing system that was segmented from other capital markets and restricted in scope, and a tax system that abetted the demand for housing relative to other investments. In the early Eighties, each of these elements changed. Financial reform brought the housing name system into tune with the rest of the financial sector, and tax cuts increased the demand for forms of investment other than housing. Most important, the rate of inflation slowed dramatically, falling below 4 percent in both 1982 and 1983. The result of all these occurrences was fairly predictable: A decline in the demand for housing as an investment. However, this declining demand has been offset by two factors. The first is the drop in nominal interest rates that accompanied declining inflation. This increased the "affordability" of homing. Second, large numbers of households entered prime home-buying years and spurred demand for housing as shelter. The current situation is a housing market driven more by consumption demand than by investment demand     

Non-Price Barriers to Home Ownership*

The impact of regulation of the nominal rate of interest for mortgages in the Australian market for housing finance is examined under inflationary conditions. It is argued that the neglected distributional consequences of the induced tightening of non-price rationing of funds militate against the availability of housing finance to low income groups and first home buyers. Policy to increase availability should take account of the institutional features of the mortgage contract.     

A Model of the Australian Housing Market

We build an empirical model of the Australian housing market that quantifies interrelationships between construction, vacancies, rents and prices. We find that low interest rates (partly reflecting lower world long-term rates) explain much of the rapid growth in housing prices and construction over the past few years. Another demand factor, high immigration, also helps explain the tight housing market and rapid growth in rents in the late 2000s. A large part of the effect of interest rates on dwelling investment, and hence GDP, works through housing prices.     

Causal relationship between construction investment policy and economic growth in Turkey

The construction industry in countries experiencing severe economic crisis has vital importance to get out of stagnation because of its direct relations with 200 different sectors. In this study, the relationship between the construction growth data (infrastructure, building and residential (public), building and residential (private) investment) and gross domestic product (GDP) is examined for Turkey. To this end, Engle–Granger cointegration, error correction model (ECM) and Granger causality tests were applied in order to determine the aforementioned relation. It has been found that the infrastructure and building–residential investments have direct relations with the GDP and have causality effects.     

Multivariate Analysis of the Condition of the Property Development Sector: Selected Local Real Estate Markets in the European Union

The aim of the study is to serve as a multidimensional analysis of relationships between the economic and financial standing of property developers and the residential property market situation. The discussion concerns the property development market situation in the context of the construction market situation, with particular emphasis on residential housing investment in selected EU countries. Property development companies whose activities focused on residential housing were assessed with respect to performance in the selected market on the stock exchange. Individual companies were classified using economic and financial indices. Despite the ongoing economic downturn in real estate markets, the results for these companies did not indicate poor performance on the stock exchange. In the study, a synthetic measure of development was used in linear ordering.     

Inflation and extraordinary returns on owner-occupied housing: Some implications for capital allocation and productivity growth

This paper examines the effects of inflation on the allocation of resources between residential and nonresidential uses and the productivity of capital in the U.S. We begin by calculating the realized rates of return on homeowner equity and the contributions of fixed-rate mortgages and differences in relative inflation rates to extraordinary earned real returns. The paper then focuses on the implications of the extraordinary real returns on residential capital for stock prices and on the demand for owner-occupied housing. Proposals for achieving efficient allocation of capital between residential and nonresidential uses are also considered.     

The loan structure and housing tenure decisions in an equilibrium model of mortgage choice

The objective of this paper is to understand how loan structure affects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find that the loan structure is a quantitatively significant factor in a household's housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan over time reducing mobility. Changes in the structure of mortgages have implications for risk sharing.     

Explaining UK house price inflation 1971–89

An econometric analysis of UK house price inflation and changes in residential construction is presented for the period 1971–89, paying particular attention to the supply side of the housing market. The results of this analysis are used to examine the contributions of the various factors to the nominal rate of house price inflation. While the results confirm the importance of real disposable income in determining house prices, they indicate that supply variables may be of greater importance than interest rates in this respect. There are close similarities between the three housing booms of the 1970s and 1980s.     

交通住房政策效应与生产和人口的过度集中

通过构建资本与人口流动模型,本文研究发现,在存在大量失业人员的条件下,政府出台改善大城市交通住房条件的单一政策,或者对大城市的倾斜性投资政策,将促使大城市生产和人口进一步集中,交通成本和住房价格进一步上升,而厂商和工人的福利并没有改善,即改善交通住房条件的单一政策或倾斜性投资政策具有无效性。这种政策可能导致虚假繁荣,即GDP上升,但大量社会产出被交通住房成本的进一步上升所抵消,除土地所有者外,绝大多数人的实际收入和福利没有改变。为避免交通住房等政策的无效性,应当采取多种其它政策相配合。     

Mortgage product diversity: responding to consumer demand or protecting lender profit? An asymmetric panel analysis

This article explores determinants of mortgage product diversity for owner-occupied and investment loans in the Australian housing mortgage market. From 2001 to 2012, 65 lenders introduced 1220 mortgage products in Australia. We examine whether the product proliferation was a result of consumer demand or a response to pressure to lower lending rates. We find that consumer demand for mortgages does not have a significant relationship with the number of mortgage products, but that decreases in the policy interest rate are highly significant as an explanatory variable for product proliferation. Such behaviour is consistent with information obfuscation, reducing the ease with which consumers can compare lending rates. Further, the relationship between mortgage products offered and the policy interest rate is asymmetric: decreases in the cash rate are associated with increased mortgage products offered, but increases in the cash rate have a more muted effect on decreasing the number of products.     

Collateral equilibrium,I: a basic framework

Much of the lending in modern economies is secured by some form of collateral: residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities, and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure, and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the subprime mortgage market.     

Housing cycles and efficiency

This paper has four objectives. First, a small model of the UK housing market is constructed, including equations for house prices, housing starts, construction costs and interest rates. The model is used in an analysis of housing market cycles, employing techniques developed for the analysis of general business cycles. Second, the model is used to consider housing market efficiency. Third, the model is extended to examine the relationship between house prices and property transactions. Finally, the role of monetary policy in the generation of housing cycles and stability is discussed.     

The Positive Externalities of Chapter 13 “Cramdowns” Could Prevent the Next Foreclosure Crisis

Revision of Bankruptcy Code 11 U.S.C. § 1322(b)(2) would permit “cramdowns” wherein bankruptcy judges would administer the modification of residential mortgages only when mortgage-lending abuses were most rampant (a real estate bubble). Foreclosure spill-over effects systemically worsened the housing crisis and were not evenly diffused throughout the broader housing market. Throughout 2003–2006, an oversupply of underpriced mortgage finance emanating from lax underwriting standards bid up residential prices. Relaxation of underwriting protocols came about from the mortgage market’s institutional swing from regulated agency securitization (predominantly government-sponsored enterprises “GSEs”) to unregulated securitization (shadow banking). This resulted in an untenable residential-price bubble as synthetically inexpensive credit from investors’ mispricing amplified mortgage demand, while greater mortgage quantity nudged up housing prices. The result was a self-referential cycle of waning residential prices supporting and perpetuating nigh incessant foreclosures: the bubble had burst. Cramdowns would incentivize lenders to be less inclined to loosen underwriting standards, or when done, to include this factor in the risk premium of the cost of credit. Enhancing Chapter 13 with the muscle to alter residential mortgages would ameliorate an institutionally structural issue endemic to the past (and upcoming?) foreclosure crisis.     

NEXUS BETWEEN HOUSING AND THE MACRO ECONOMY: THE HONG KONG CASE

Abstract.  This paper shows that, consistent with the 'economic base' theory, exports drive domestic consumption and domestic investment, but housing appears to serve as an important link between exports and domestic expenditures. Focusing on the Hong Kong economy, which is a small open economy with a big population, we found that exports and interest rates drive housing prices over a long period, while housing prices in turn drive domestic expenditures.     

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the long-run. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.     

Capital goods,measured TFP and growth: The case of Spain

The effect of investing in equipment and/or structures on TFP and long run growth is investigated here. We argue that economies can grow in spite of stagnant TFP if the investment rate is inefficiently high. We study the case of Spain where real GDP per worker grew at 2.74 percent annually and TFP was stagnant during 1996–2007. We show that low Spanish TFP is due to low ISTC and an inefficiently high investment in residential structures. We quantify the effect of the housing boom of the 2000s, the total cost of subsidies to residential structures in terms of TFP and income growth.     

Interest Rate Volatility Regimes in Selected Asian Countries:A Univariate Markov Switching Analysis

Business cycle dynamics are determined by relatively large volatilities in output,consumption,and investment,which leads to cyclical fluctuations in interest rates.Using the Markov switching model,we model the nominal interest rate movements to explain the volatility regime shifts in a set of selected emerging Asian economies.The estimated results provide significant evidence of regime-dependent means,variances,and probabilities in both stable and volatile regimes in selected countries,confirming the existence of two distinct regimes in nominal interest rate movements.In addition,the smoothed probability results of switching autoregressive model show that the model is capable of capturing the two regimes for the corresponding nominal interest rate behaviors.Besides,the results reveal that the stables regimes have higher durations than the volatile regimes.This study also shows the advantage of Markov switching models over conventional regression models,allowing the identification of different regimes for the cyclical behavior of interest rates.