what should central banks do about real estate prices? franklin allen and elena carletti asset...
TRANSCRIPT
What should Central Banks do aboutReal Estate Prices?
Franklin Allen
and
Elena Carletti
Asset Prices, Credit and Macroeconomic Policies
March 25-26, 2011
Idep-Greqam, Marseille, France
2
Real Estate Markets and Financial Stability
• Reinhart and Rogoff (2009) document that many financial crises are the result of a sharp drop in property prices
• In the current crisis Ireland, Spain and some regions of the U.S. had sharp run ups and then collapses in property prices that have had a severe effect on these countries’ banking systems and economies
3
Figure 1Nominal housing Prices in Ireland, Spain and the U.S.
4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
Some other countries
FranceGermanyGreeceItalyPortugalSpainUKUSA
Hous
e Pr
ice In
dex
5
What are the causes of these real estate bubbles?
• It is widely argued there are two important ones
1. Loose monetary policy – low interest rates
2. Global imbalances – easy availability of credit
6
Total Reserves in Billions of US $ 1996-2009
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Total
Asia
Oil producers
Latin America-oil producing
Central & Eastern Europe
7
Residential Mortgages
8
Figure 3Current Account Deficits as % of GDP
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
SpainIrelandUnited States
9
• The debate needs to go beyond Taylor’s (2008) assertion that low interest rates cause property bubbles if preventive policies are to be designed
• We need to model how property bubbles arise
10
Theories of bubbles
1. Infinite horizon (Tirole 1985, Caballero and Krishnamurthy 2006, Kocherlakota (2010), and Farhi and Tirole 2010)
2. Asymmetric information (Allen, Morris and Postlewaite 1993, Conlon 2004, and Dobles-Madrid 2010)
3. Agency problems (Allen and Gorton 1993, Allen and Gale 2000, 2003, Barlevy 2009)
4. Behavioral (De Long et al. 1990, Herring and Wachter 1999, Abreu and Brunnermeier 2003, and Scheinkman and Xiong 2003)
11
What should a theory of bubbles explain?
• In “normal times” there are not property bubbles (e.g. Germany for last 20 years)
• In “bubble times” there is a sharp increase in leverage and run up in property prices, then a collapse
• This distinction suggests there is a threshold where speculators enter and start a bubble
• We use an agency approach to model this
12
Normal timesWillingness to pay for housing services
Supply of housing services
S1’Pr. π
S1’’Pr. 1- π
P1’ = H(S1’)
P1’’ = H(S1’’)
N 1 10 0
C
P (1 )PP H
1
Risk neutral consumers determine prices
13
Bubble times
• Risk neutral speculators use their own wealth W and loan with loan-to-value ratio λ to buy x units at price Pt
so • We focus on the case where there is no default when
the price is high but there is when it is low so speculators enter if
t tP x W P x
N0 S 1 0 0 SH (1 ) P (1 r ) P x W(1 ).
14
• In this case speculators enter and the price is bid up so this condition is satisfied with equality and there is a bubble if
• In the special case ρS = ρC = r0 = r we can simplify the entry condition by substituting the borrowing constraint
B N0 S 1 S0 0
0
H (1 ) P W(1 ) /( x)P P
(1 r )
N10 0
P 'H P
1 (1 ) 1 r
15
• In the special case λ = 1, W = 0 and ρS = ρC = r0 = r
• In this case bubbles always occur
B N1 1 10 0 0 0
P P (1 )PP H P H
(1 r) 1 r
16
Policy considerations
• Objective of policy should be to prevent bubbles occurring in the first place and restoring normal times if speculators have entered
• Speculators’ entry condition more likely to be satisfied with low interest rates and easily available credit
• Monetary policy and credit availability can have a role to play in controlling bubbles in small homogeneous countries like Sweden but in large heterogeneous economies like China, the Eurozone and the U.S. macro-prudential policies need to be relied upon
17
Macro-Prudential policies
Macro-prudential policies are designed to counter a whole range of systemic risks
• Countercyclical regulatory policy
• Control of contagion risk
• Discretionary policies
18
Macro-Prudential policies for real estate
• Should eliminate speculators’ incentive to enter the real estate market and create a bubble
1. Mandatory reductions in loan-to-value ratios
2. Increases in annual real estate taxes
3. Increases in taxes on real estate transfers
4. Direct restrictions on real estate lending
19
Implementation of macro-prudential
• Borio and Lowe (2002) and other papers from the BIS suggest difficult but not impossible to identify property bubbles
• Christensson et al. (2010) look at Financial Stability Reports of the Netherlands, Norway, Spain, Sweden, and the U.K. over the period preceding and during the crisis
• FSRs were successful in identifying risks and unsustainable trends but many were regarded as low probability events not worthy of action
20
Chinese experience
• The Chinese have tried a number of these measures
– Lower loan-to-value ratios for second, third, and more houses
– Taxes on resales of certain types of housing– Restrictions on foreigners buying– Loan restrictions on commercial property
• They have not worked very well in the major cities
21
50100150200250300350400
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
i ncome
housi ng pri ce, RMB/ sqm
Bei j i ng Housi ng Pri ce vs Di sposabl e Annual IncomeNormal i zed, base year=2002adj usted by CPI, 2002=100
22
50100150200250300350
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
i ncome
housi ng pri ce, RMB/ sqm
Shanghai Housi ng Pri ce vs Di sposabl e Annual Incomeadj usted by CPI, 2002=100
23
50100150200250300350400
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
i ncome
housi ng pri ce, RMB/ sqm
Shenzhen Housi ng Pri ce vs Di sposabl e Annual IncomeNormal i zed, base year=2002adj usted by CPI, 2002=100
24
Concluding remarks
• Objective of policy should be to prevent the property market becoming speculative
• Monetary policy and credit availability can have an important role in some economies like Sweden
• It is not clear that macro-prudential policies will prevent or eliminate bubbles but they may help
• Inefficiency of property markets is also important, i.e. positive serial correlation of returns (e.g. Englund, Quigley and Redfearn 1998), and needs to be incorporated in the analysis