Econometric Regime Shifts and the US Subprime Bubble

Using aggregate quarterly data for the period 1975:Q1–2010:Q4, I find that the US housing market changed from a stable regime with prices determined by fundamentals, to a highly unstable regime at the beginning of the previous decade. My results indicate that these imbalances could have been detected with the aid of real‐time econometric modeling. With reference to Stiglitz's general conception of a bubble, I use the econometric results to construct two bubble indicators, which clearly demonstrate the transition to an unstable regime in the early 2000s. The indicators are shown to Granger cause a set of coincident indicators and financial (in)stability measures. Finally, it is shown that the increased subprime exposure during the 2000s can explain the econometric breakdown, i.e. the housing bubble may be attributed to the increased borrowing to a more risky segment of the market. Copyright © 2013 John Wiley & Sons, Ltd.     

Self-reinforcing effects between housing prices and credit

The financial crisis has brought the interaction between housing prices and household borrowing into the limelight of the economic policy debate. This paper examines the nexus of housing prices and credit in Norway within a structural vector equilibrium correction model (SVECM) over the period 1986q2–2008q4. The results establish a two way interaction in the long-run, so that higher housing prices lead to a credit expansion, which in turn puts an upward pressure on prices. Interest rates influence housing prices indirectly through the credit channel. Furthermore, households’ expectations about the future development of their own income as well as in the Norwegian economy have a significant impact on housing price growth. Dynamic simulations show how shocks are propagated and amplified. When we augment the model to include the supply side of the housing market, these effects are dampened.     

Household borrowing and metropolitan housing price dynamics – Empirical evidence from Helsinki

This article argues that, especially in the absence of sufficient direct data on credit constraints, it is reasonable to add a household debt variable in an empirical model studying housing price dynamics. This is because household borrowing is likely to reveal information regarding the credit constraints faced by households. Moreover, debt may also give information on expected income growth and interest rate movements. The aim of this study is to examine empirically if household borrowing data, indeed, is of importance in a dynamic housing price model. In line with the prior expectations, it is found that housing appreciation in the Helsinki Metropolitan area is Granger caused by the household debt-to-GDP ratio both in the short and in the long run. Causality from the housing market to credit, in turn, seems to run only through a cointegrating long-run relation. While the estimated long-run relation between housing prices, income and debt-to-GDP ratio appears to have remained stable through the sample period (1975Q1-2006Q2), the short-run dynamics changed somewhat due to the financial liberalization in the late 1980s. The stability of the long-run relation implies that the loan data are able to cater, at least to a notable extent, for the effect of the changes in Finnish households’ liquidity constraints on housing demand. In line with previous literature, it is also found that housing price adjustment is sluggish and includes notable backward-looking features.     

Job creation and housing construction: Constraints on metropolitan area employment growth

Differences in the supply of housing generate substantial variation in house prices across the United States. Because house prices influence migration, the elasticity of housing supply also has an important impact on local labor markets. I assemble evidence on housing supply regulations and examine their effect on metropolitan area housing and labor market dynamics. Locations with relatively few barriers to construction experience more residential construction and smaller increases in house prices in response to an increase in housing demand. Furthermore, housing supply constraints alter local employment and wage dynamics in locations where the degree of regulation is most severe.     

Price dynamics in public and private housing markets in Singapore

In down-payment constrained housing consumption models, increases in house prices could trigger household mobility decisions in housing markets. This study empirically tests house price dynamics associated with the mobility of households in the public resale and private housing markets in Singapore. The results show that stochastic permanent breaks were found in the public housing resale prices and private housing prices. The relative prices drift apart occasionally, but mean-revert to a long-run fundamental equilibrium. Error correction mechanisms and lagged public housing prices were also found to have significant explanatory effects for price changes in the private housing markets. The results support the hypothesis that household mobility creates co-movements of prices in public and private housing submarkets in the long run.     

Housing investment: What makes it so volatile? Theory and evidence from OECD countries

This paper explains how mortgage market liberalization can introduce greater volatility in the housing market, which is a stylized fact documented from OECD countries, with a DSGE model where households face a credit constraint and housing is used as collateral. The housing collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to technology shocks and strengthens in economies with more liberalized mortgage markets.     

基于SD的城镇住房保障规模对商品房价格抑制效应仿真研究

为从定量上了解城镇住房保障规模对商品房价格影响的变化规律,本文应用Granger因果分析理论确定了影响住房保障规模和商品房价格的主要因素及其关系,构建了住房保障规模的系统动力学模型,并进行了模拟仿真。结果显示,住房保障规模增加10%可抑制商品房价格4.67%的上涨幅度,表明了保障性住房的投入对商品房价格的抑制效应,并就如何加快保障性住房建设提出了建议。     

Consumption, house prices, and collateral constraints: a structural econometric analysis

If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple two-agent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.     

Do house price developments spillover across euro area countries? Evidence from a global VAR

This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. A global VAR is estimated for three housing demand variables (real house prices, real per capita income, and the cost of borrowing, captured by a real long-term interest rate) on the basis of quarterly data for 7 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy and the Netherlands), which together comprise nearly 90% of euro area GDP, over the period 1971–2009. The results suggest limited house price spillovers in the euro area, albeit with evidence of some overshooting in the first year after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country’s economic weight. This contrasts with the impacts of a shock to domestic long-term interest rates, causing a permanent shift in house prices after 2–3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for weights – either economic or geographic – in governing their general magnitude. More generally, the impact of financing costs on house prices appears to have grown though time.     

Housing prices and the business cycle: An empirical application to Hong Kong

This paper develops a two-agent, two-sector, open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. We identify strong and robust housing wealth effects, and show that property prices are mainly driven by intratemporal preference perturbations rather than by disturbances in financial frictions or price mark up shocks. These disturbances also explain a non-negligible part of the volatility of consumption, GDP and employment.     

Determinants of house prices in Istanbul: a quantile regression approach

This paper uses quantile regression methods where a hedonic equation is estimated for each quantile of the conditional distribution of housing prices. The survey data are used to investigate the relationship between house prices and housing characteristics in Istanbul. This data set includes some housing characteristics of the dwellings like numbers of room, bathroom, heating system, location of house etc. In the results of this paper show some similarities and differences from earlier studies on housing prices. We find that age, cable tv, security, heating system, garage, kitchen area, increasing numbers of room and bathroom increase the house prices. Our findings also show that side variable which is a special factor for Istanbul real estate market has negative effect on the prices. It is clear that the factors of housing prices can change because of the properties of country, region or city. The results of this study may give some important interpretations for developing real estate market.     

The Valuation of Real Capital: A Random Walk down Kungsgatan

This paper analyzes the temporal pattern of prices for single-family housing. We estimate models of house price dynamics using a repeat sales framework, and we use the results to test for a random walk in asset prices. For eight large samples of housing transactions, representing essentially all house sales in Sweden during a 12-year period, we reject the hypothesis that house prices follow a random walk in favor of a model of first-order serial correlation.     

Housing prices and macroprudential policies: Evidence from microdata

This paper examines the efficacy of macroprudential policies in addressing housing prices in a developing country like India, utilizing two novel databases on city-level house prices in India. Though the empirical models provide evidence of a sizable effect of the fundamental factors in influencing house price dynamics, they also reveal strong countercyclical properties of macroprudential tools i.e., loan-to-value (LTV) limit, risk weights, and provisioning requirements, in influencing housing price movements. Among the macroprudential policy tools, the LTV limit emerges as the most potent one in influencing the price dynamics. A granular investigation of the effectiveness of macroprudential tools suggests that the countercyclical effect of the regulatory ratios for large-sized mortgages is much stronger as compared with those for the small-sized mortgages, attributed mainly to investment motives associated with the large-sized loans. We also find the presence of asymmetry in the impact of loosening versus the tightening of the LTV limit, which can be attributed to the procyclical behavior of the house prices.     

The housing market and the monetary transmission mechanism in the UK, in and out of EMU

This paper, prepared for the No Campaign, uses the OEF Global Macroeconometric Model to assess the impact of the housing market on the UK's convergence with the Eurozone. The OEF Model provides the ideal framework for such analysis, as it incorporates a detailed system for forecasting UK house prices, transactions, mortgage borrowing and their interaction with consumer spending and the wider economy, within the context of a model of the Eurozone economy. Our analysis suggests that, if the government were to wish to take the UK into EMU, action to reduce the impact of changes in interest rates on the housing market would be beneficial in improving the UK's economic stability.     

Do policymakers need to cool the UK housing market?

The combination of government schemes and a recovery in the wider economy underpinned a robust pickup in housing transactions and house prices through 2013. But there is no evidence of a housing bubble across most of the country. Across the majority of regions prices are still below previous peaks in nominal terms and much lower still in real terms. Meanwhile measures of affordability and indebtedness are in a much better state than they were prior to the financial crisis. The exception is London, where supply shortages and strong demand have pushed both the price‐to‐income ratio and average income multiple back to previous highs. An improving macroeconomic backdrop and ongoing support from Help to Buy should ensure that demand continues to strengthen, supporting further growth in transactions. There has been a strong supply response over the past nine months and this should continue, which will help to keep a lid on price growth. Divergent macroeconomic prospects across the regions will lead to a wide variation in house price growth, with London expected to lead the way. We do not see a case for changing the terms of Help to Buy, particularly given that the most likely source of a bubble is London, where the impact of Help to Buy is likely to be small. In our view, the average income multiple is crucial and macro prudential tools should be used if it continues to rise above previous peaks in any regions. The most likely cause of a bubble at the national level would be an inadequate supply response. Alongside its policies to support demand, the government should implement a series of measures aimed at increasing supply, including planning reform, and it could also consider using its low borrowing costs to fund public sector house building.     

Ramsey equilibrium with liberal borrowing

This paper considers a multi-agent one-sector Ramsey equilibrium growth model with borrowing constraints. The extreme borrowing constraint used in the classical version of the model, surveyed in Becker (2006), and the limited form of borrowing constraint examined in Borissov and Dubey (2015) are relaxed to allow more liberal borrowing by the households. A perfect foresight equilibrium is shown to exist in this economy. We describe the steady state equilibria for the liberal borrowing regime and show that as the borrowing regime is progressively liberalized, the steady state wealth inequality increases. Unlike the case of a limited borrowing regime, an equilibrium path need not converge in the case of liberal borrowing regime. We show through an example that a two period cyclic equilibrium exists when agents are allowed to borrow against their two period future wage income. This result is similar to the possibility of non-convergent equilibrium capital stock sequences in the model with no borrowing.     

Measuring the effects of mixed land uses on housing values

Mixing land uses has become one of the key planning principles of the Smart Growth movement and other land use planning strategies. This article analyzes the impact on the prices of single family houses when mixed land uses are included in neighborhoods. We first develop several quantitative measures of mixed land uses through the use of Geographic Information System (GIS) data and compute these measures for various neighborhoods in Washington County, OR. We then incorporate those measures in a hedonic price analysis. We conclude from this research that housing prices increase with their proximity to—or with increasing amount of—public parks or neighborhood commercial land uses. We also find, however, that housing prices are higher in neighborhoods dominated by single-family residential land use, where non-residential land uses were evenly distributed, and where more service jobs are available. Finally, we find that housing prices tended to fall with proximity to multi-family residential units.     

Can a stochastic cusp catastrophe model explain housing market crashes?

Like stock market prices, housing prices often exhibit temporary booms and busts. A possible explanation for the observed abrupt changes is offered by the stochastic catastrophe model. This paper addresses the question whether the catastrophe model can describe and predict the dynamics of housing markets. We fit a stochastic cusp catastrophe model to empirical housing market data for six OECD countries, US, JP, UK, NL, SE and BE. Two different estimation approaches are considered – Cobb׳s method and Euler discretization. The analysis shows that while Cobb׳s approach describes the long-run stationary density better, Euler discretization is more tailored for time series, as it provides better one-step-ahead predictions. Proceeding using the Euler discretization method we discuss the dynamics of housing markets in terms of the multiple equilibria cusp catastrophe model. By considering the long-term interest rate as an exogenous variable we obtain new insights into the policy implications of interest rate levels, in particular concerning the stability of housing markets.     

Quantitative easing and the loan to collateral value ratio

We study optimal monetary policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.     

Supply constraints and housing market dynamics

Although the volatility of house prices is often ascribed to demand-side factors, constraints on housing supply have important and little-studied implications for housing dynamics. I illustrate the strong relationship between the volatility of house prices and the regulation of new housing supply. I then employ a dynamic structural model of housing investment to investigate the mechanisms underlying this relationship. I find that supply constraints increase volatility through two channels: First, regulation lowers the elasticity of new housing supply by increasing lags in the permit process and adding to the cost of supplying new houses on the margin. Second, geographic limitations on the area available for building houses, such as steep slopes and water bodies, lead to less investment on average relative to the size of the existing housing stock, leaving less scope for the supply response to attenuate the effects of a demand shock. My estimates and simulations confirm that regulation and geographic constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks, which in turn amplifies house price volatility.