The Housing Meltdown: Why Did It Happen in the United States?

The crisis enveloping global financial markets since August 2007 was triggered by actual and prospective credit losses on US mortgages. Was the United States just unlucky to have been the first to experience a housing crisis? Or was it inherently more susceptible to one? I examine the limited international evidence available, to ask how the boom- bust cycle in the US housing market differed from elsewhere and what the underlying institutional drivers of these differences were. Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices. Some of these outcomes seem to have been driven by tax, legal and regulatory systems that encouraged households to increase their leverage and permitted lenders to enable that development. Given the institutional background, it may have been that the US housing boom was always more likely to end badly than the booms elsewhere.Housing construction; Housing prices; Mortgage delinquencies; Mortgage markets; Subprime

Housing and Housing Finance: The View from Australia and Beyond

This paper draws together themes from work at the RBA, other national central banks, the BIS and elsewhere on recent developments in housing and housing finance. The general conclusion is that financial and macroeconomic developments have increased the demand for the stock of housing. Because the stock of housing is inherently slow to adjust, this has increased its relative price. Although this is a global trend, individual country institutions have affected outcomes, sometimes in ways that are not obvious. The resulting expansion in both sides of the household balance sheet is an important development for policy-makers to monitor, but it is probably not of itself a cause of financial instability.housing; housing finance; economic geography; cross-country

Commercial Property and Financial Stability - An International Perspective

Commercial property and property development have historically posed a greater direct risk to financial institutions’ balance sheets than have housing and mortgage markets. A number of factors contribute to this: banks’ commercial property lending is concentrated in loans for construction and development, which tend to be risky; imbalances can build up further because construction lags are longer; and incentives to avoid default are weaker for borrowers in the commercial property sector than they are for home loan borrowers. Conditions in global commercial property markets have been especially challenging in the current cycle.banks; commercial property; financial stability; loan losses

Housing Construction Cycles and Interest Rates

Housing investment is one of the most cyclical components of GDP. Much of that cyclicality stems from the sector’s sensitivity to interest rates, but it is also possible that construction lags generate intrinsic cyclicality in this sector. Although the housing sector is generally considered to be more interest-sensitive than the economy as a whole, the degree of this sensitivity seems to vary between countries and through time. In this paper, we model the housing markets in Australia, the United States, the United Kingdom and Canada using a structural three-stage least-squares system. We document the variations in the housing sector’s cyclicality and sensitivity to movements in interest rates, and attempt to determine the underlying causes of these differences.cycles; housing construction; interest rates

Measuring the Real Exchange Rate: Pitfalls and Practicalities

The real exchange rate is an important concept in economic theory, but it is not directly observable and must be constructed, usually as an index. The construction of such indices requires a number of decisions – which currencies to include, the appropriate weighting scheme and the price measures to use – which materially alter the results. Unfortunately, theory often gives very little guidance on the appropriate assumptions to make when constructing an exchange rate index. This paper discusses the various choices, highlighting their differing implications. Some of the practical issues of calculation are also reviewed. Several exchange rate indices that have been used in analytical work in the Reserve Bank are presented. These will be updated quarterly on the Reserve Bank website at .effective exchange rate; index numbers; real exchange rate index

City Sizes, Housing Costs, and Wealth

Australia’s household sector appears to hold a greater proportion of its wealth in dwellings than do households in other countries. Average dwelling prices in Australia also appear to be high relative to household income, but dwellings in Australia are not noticeably higher in quality than those in comparable countries. This concentration of wealth in housing also does not seem attributable to government policies that encourage dwelling investment in Australia to a greater extent than is true overseas. A possible reconciliation of this pattern may be the unusual concentration of Australia’s population in two large cities. Average housing prices tend to be higher in larger cities than smaller ones. Therefore, the expensive cities in Australia drag up the average level of dwelling prices more than in other countries, resulting in a higher share of wealth concentrated in housing. The increasing importance of dwelling wealth in Australia over recent years largely reflects the consequences of disinflation and financial deregulation. This is most likely a transitional effect, and the ratio of dwelling wealth to income should stabilise, or begin to grow more slowly, in the future.dwelling prices; rank-size rule; Zipf’s Law

Forward-looking Behaviour and Credibility: Some Evidence and Implications for Policy

Whether people form their expectations of the future in a model-consistent or extrapolative manner, has implications for the way the economy and monetary policy are modelled. The first half of this paper provides three pieces of information about inflation expectations – that survey measures of expectations are inconsistent with rational expectations, but less so for financial markets than households; that actual and expected inflation interact with each other; and that the foreign exchange market anticipates tighter monetary policy when inflation is higher than expected. The second half of the paper explores some policy implications. First, the variability of inflation and output is lower when policy-makers respond to model-based forecasts, rather than just current values, of inflation and output. Second, model-consistent behaviour elsewhere in the economy stabilises inflation and output, given that the model includes a central bank reaction function which the public believes the bank will adhere to. When inflation expectations differ between groups, the ex ante real interest rates that affect output and the exchange rate differ from each other, and this can induce oscillations or overshooting in the exchange rate, with consequences for the variability of inflation and output. Third, ‘optimal’ policy cannot fully compensate for the greater variability in inflation and output associated with extrapolative expectations.expectations; inflation; credibility; monetary policy

Housing Leverage in Australia

A home is the single largest purchase that most households make, and it is one that usually requires some debt financing. Because housing debt is such a large component of households’ balance sheets, it is important to understand the financing decision. In this paper, we use household level data from the HILDA survey to relate households’ leverage to their observed characteristics using both graphical and econometric techniques. We also model the decisions to own a home and to have debt against it. We correct for any possible selection bias arising from these decisions before drawing conclusions about population behaviour. Much of the variation in leverage is attributable to the passage of time, as borrowers pay down their loans on schedule and the value of their homes rise. On top of these largely exogenous effects, we find evidence that some households make conscious decisions that strongly affect leverage. For example, Australian homeowners generally plan to pay off their mortgage before its contracted end date, and many are therefore ahead of schedule in paying off their housing debt. On the other hand, a minority of households have higher leverage than similar households because they have engaged in leveraged investment in both owner-occupied and rental housing.household survey; housing debt; leverage