The Long-Term Evolution of House Prices: An International - PowerPoint PPT Presentation

The Long-Term Evolution of House Prices: An International Perspective Canadian Association for Business Economics Kingston, Ontario 25 August 2015 Lawrence Schembri Deputy Governor Bank of Canada

Outline Introductory remarks:  Motivation: Housing is important; useful to provide context  Approach: Examine house prices across time & countries (Advanced SOEs) Long-run determinants of house prices:  Demand: Macroeconomic, demographic, and credit conditions,  Supply: Regulation and geography Policy implications:  Macroprudential policy : effectiveness & complementary role Key messages 2

Real house prices have increased globally since 1995 a. Real house price index; no post-crisis correction b. Real house price index; post-crisis correction Index: average = 100 Index Index Index: average = 100 250 250 200 200 150 150 100 100 50 50 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Australia Canada Norway New Zealand Sweden Spain United Kingdom Ireland Italy United States 3

Conceptual issues – multiple dimensions  Housing is both a consumption good (housing services) and an asset (store of wealth)  Owner-occupied housing versus renting  Single-family versus multiple unit  Composite good: structure and land  Existing versus new house Focus: owner-occupied; existing singles & multiples; composite price 4

Demand Factors 5

Demand factors Macroeconomic  Rising disposable incomes; lower long-term real interest rates Demographic  Population growth; migration Credit conditions  Improvements due to financial liberalization and innovation Other possible factors  Macro-policy framework improvements, international investment, preference shifts and regulatory/tax changes 6

House prices have increased relative to incomes a. Nominal house price to income ratio b. Real personal disposable income Index: average = 100 Index: average = 100 Index Index 180 200 180 160 160 140 140 120 120 100 100 80 80 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Australia Canada Norway New Zealand Sweden Australia Canada Norway New Zealand Sweden 7

Population growth has contributed to house price increases, aided by net migration: 1975-94 and 1995-2014 a. Total population growth b. Net migration to total population Average annual growth rate % Average annual as a per cent % 1.5 0.8 0.6 1.0 0.4 0.5 0.2 0.0 0.0 Australia Canada Norway New Zealand Sweden Australia Canada Norway New Zealand Sweden 8

Increasing urbanization is important Urbanization increase: 1975-94 and 1995-2014 % Average annual growth rate 0.5 0.4 0.3 0.2 0.1 0.0 Australia Canada Norway New Zealand Sweden 9

Credit conditions for housing finance have eased A Lower long-term Lower global interest rates mortgage rates F F O R D Financial A liberalization B Broader and more I efficient access to L housing finance I Financial T innovation Y 10

Real long-term interest rates have trended downward since 2000 % Real 10-year government bond yields: 1995-2015 10 8 6 4 2 0 -2 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Australia Canada Norway New Zealand Sweden 11

Housing finance index, mortgage market depth and home ownership rates % a. IMF mortgage market index and ratio of b. Home-ownership rates residential mortgage-debt-to-GDP Index 90 1.0 United States 85 Denmark 0.8 Australia Sweden 80 Netherlands Canada 0.6 Norway 75 United Kingdom Spain 0.4 70 Italy France 0.2 65 60 0.0 1995 2000 2005 2010 0 20 40 60 80 100 Australia Canada Norway Sweden Residential mortgage-debt-to-GDP ratio (2001-06 average, %) 12

Mortgage funding by covered bonds and securitization has risen a. Covered mortgage bonds outstanding b. Mortgage securitization outstanding as Securitization as a share of total household credit a share of total mortgage credit share % % (%) 8 200 60 6 150 45 30 4 100 15 2 50 0 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Private Securitization - United States Canada (left scale) New Zealand (left scale) Public/Agency Securitization - United States Australia (left scale) Norway (right scale) Private Securitization - Canada Sweden (right scale) Denmark (right scale) Public /Agency Securitization - Canada Total Securitization - Australia 13

Other factors supporting demand for houses International Shifting investment preferences Macro & Other financial government policy policies Demand frameworks for houses 14

Supply Factors 15

Regulatory and physical constraints limit the price responsiveness of housing supply Regulation Geography Land use/zoning regulations Bodies of water Greenbelts Inhospitable terrain Development fees 16

Land-use regulation and geographical constraints increase price-to-income ratio Median price-to-income ratio and land-use regulation: 2014 Hong Kong Vancouver Sydney San Francisco Melbourne London (GLA) Los Angeles Toronto New York Tokyo Montreal Calgary Saskatoon Edmonton Las Vegas Winnipeg Ottawa Chicago Houston Detroit 0 3 6 9 12 15 18 Median multiple More-restrictive regulation More-restrictive regulation Less-restrictive regulation Less-restrictive regulation (Canada) (International) (Canada) (International) 17

House prices rise with increases in urban density: 1995-2014 Price change % 250 Calgary Winnipeg Edmonton 225 200 Toronto Quebec City 175 Montréal 150 Ottawa Vancouver 125 100 -20 -10 0 10 20 30 40 50 60 Change in population per square kilometre (%) 18

With population density increasing and binding supply constraints , multi- unit starts are dominating in Canada’s biggest cities a. Vancouver b. Montréal 000s of units 000s of units 21600 30000 16600 23000 11600 16000 6600 9000 1600 2000 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts Single family house starts Multi-unit starts c. Toronto d. Rest of Canada 000s of units 000s of units 40200 61600 31200 48600 22200 35600 13200 22600 4200 9600 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts Single family house starts Multi-unit starts 19

Policy Implications 20

Post-crisis monetary policy in advanced SOEs was effective Effective MP Lower real Countercyclical transmission: Stronger demand interest rates MP response to credible IT for houses and boosted decline in framework & rising house domestic demand resilient financial prices demand system 21

Implications of higher house prices for financial stability Two related vulnerabilities: Associated with household indebtedness and leverage Potential source of house price misalignment 22

Household leverage has grown, especially since 1995 Ratio of household-debt-to-GDP Ratio 1.2 1.0 0.8 0.6 0.4 0.2 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Australia Canada Norway New Zealand Sweden 23

Complementary role of macroprudential policy Countercyclical monetary policy increases demand for houses Increased borrowing by the most financially capable households Macroprudential policy restricts access to credit to more qualified borrowers 24

Macroprudential policy: Effectiveness Evidence on the effectiveness of loan-to-value and debt-to-income constraints and other policies Reduce procyclicality of household credit and bank leverage Moderate credit growth Improve quality of borrowers Lower rate of house price appreciation 25

Macroprudential tightening in Canada: 2008-12 Maximum amortization 40 years 25 years (insured mortgages) LTV limit for new 100% 95% mortgages LTV limit for mortgage 95% 80% refinancing LTV limit for investment 95% 80% properties GDS capped at 39% and Debt-service criteria TDS capped at 45% TDS ratio at 44% 26

Canadian post-crisis macroprudential policies contributed to higher borrower quality and lower household credit growth a. Distribution of credit scores at origination b. Mortgage credit (CMHC high-ratio mortgages) % Annualized 3-month growth rates % 90 20 80 70 15 60 50 10 40 30 20 5 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Under 600 600-659 660-699 700 and over 27

Key messages Real house prices have been rising relative to income in Canada and other comparable countries for about 20 years due to:  Demand: Demographic forces (population growth, migration), improving credit conditions, other factors  Supply: geography and regulation reduced supply elasticity, especially in urban areas Macroprudential policy experience:  complementary to monetary policy and  better suited to address financial vulnerabilities 28