New International Evidence on Policies to Stabilize Housing Markets
by Ken Gibb
Fresh from David Miles intervention on equity loans discussed in my previous post, Tony O’Sullivan forwarded me another paper that I want to share with you. This is a new econometric study (November 2013) for the Bank of International Settlements by Kenneth Kuttner and Ilhyock Shim (BIS Working Paper 433) entitled: ‘Can non-interest rate policies stabilise housing markets? Evidence from a panel of 57 economies’.
The authors start from the generally held position that interest rates are a blunt instrument that often need to go up so high that they tip the economy into recession before they can bring the housing market to heel. Hence the search for other non-interest-based policy tools that might moderate and ‘tame’ the housing market.
Like Miles’ paper, this is closely related to the literature on macro-prudential policy that seeks to ‘limit systemic risk in the financial system as a whole’ (p.2) and to a growing series of papers on policy tools other than short run interest rates with which to stabilize housing markets (they identify such papers since 2005 – see footnote below).
The authors assemble a powerful panel data set covering 57 countries employing quarterly data from 1980 to 2011, which allows them to consider a series of policy interventions in different housing markets. The authors focus on nine policy areas, grouped around three headings:
1. General credit policies
- Reserve requirements (the percentage of liabilities that have to be held as liquid reserves).
- Liquidity requirements (the ratio of highly liquid assets to total liabilities).
- Limits on general credit growth.
2. Housing-targeted specific credit policies
- Maximum LTV (sets a ceiling on housing loans).
- Maximum DSTI (debt service to income ratio).
- Reserve and liquidity requirements specific to housing credit.
- Limiting bank housing exposure as percentage of total assets/liabilities.
- Increasing the bank’s risk weight for housing (making it more expensive to extend housing loans for a given amount of bank equity – p.11).
3. Housing-related tax policies
- A range of taxes and subsidies that reduce house purchase costs – wealth and capital taxes, stamp duty, direct subsidy and tax deductions, etc. This is conceived of as ways of changing the user cost of capital.
Cutting to the chase, having undertaken a series of cross-checking tests of the robustness of their results through techniques including panel regressions and sophisticated forecasting models known as event studies (which were new to me), the authors report findings of policy impacts with respect to both housing credit and house prices.
They find that many of the policy instruments studied are not effective but that housing credit constraints in the form of tightening debt service to income ratios do make a difference in statistical significance terms. They find that a small tightening in the ratio can ‘decelerate credit’ by 4-7% over the following year. Loan to value ceilings also had a significant effect on credit but are sensitive to the statistical model specification used. The other striking effect the authors found looking at policy effects on house prices (the only statistically significant factor) was that housing-related tax increases lead to a measurable fall in house prices (i.e. a small increase in housing taxes leading to a 2-3% reduction in house price growth – though this was not symmetric and did not reverse it though a reduction in housing taxes).
The authors recognise that their models has been applied to more than 50 different economies at different stages of economic development, income levels and institutions. The results need, despite their exhaustive testing, to be treated with caution. Average effects may wash out in certain circumstances and in others imply strong effects. The point, however, is that there are important negative findings – increasing the supply of general credit has little measurable impact on housing credit and credit policies do not seem to affect house prices. At the same time, housing credit policies based around the key debt servicing ratio and housing tax-related policies do seem to have a market impact.
The authors conclude that this is a promising basis for further research to understand how policy effectiveness is influenced by more narrow legal, financial and housing market institutions and structures (p.26).
This is an interesting paper, which makes a sterling effort to wrestle with a range of policy interventions across a range of national housing systems. Of course, there are genuine difficulties in interpreting just what results from such a wide range of countries mean and what average effects imply for a specific system such as that of the UK. But, for all that, the clarity of the negative results and the positive indicative ones suggesting market-moderating roles for taxation and for a debt servicing ratio ceiling/credit constraint – are certainly intriguing.
What will the Bank of England make of this research? It should certainly note that many of the tried and tested measures may have less impact on the housing market than they may have anticipated but that there are some promising candidates, too. It is intuitive that more tailored housing-specific policies may be more effective but it is also salutary that many even of these instruments may not make much difference to the housing market. Like the authors of the study, the Bank should take this and related work and think through its relationship to UK markets and institutions. I think also that it is encouraging evidence, even if somewhat limited, for all of us who want to construct and implement tailored interventions that can promote more stability in the housing market.
Selected housing policy references in the Kuttner and Shim working paper:
Borio, C and Shim, I (2007) ‘What can (macro-)Prudential Policy do to support monetary policy?’ BIS working paper 242.
Claessens, S, S Ghosh and R Mihet (2013): “Macro-prudential policies to mitigate financial system vulnerabilities”, Journal of International Money and Finance, forthcoming.
Crowe, C, G Dell’Ariccia, D Igan and P Rabanal (2011): “How to deal with real estate booms: lessons from country experiences”, IMF Working Paper 11/91
Hilbers, P, I Otker-Robe, C Pazarbasioglu and G Johnsen (2005): “Assessing and managing rapid credit growth and the role of supervisory and prudential policies”, IMF Working Paper 05/151.
Lim, C H, F Columba, A Costa, P Kongsamut, A Otani, M Saiyid, T Wezel and X Wu (2011): “Macroprudential policy: what instruments and how to use them? Lessons from country experiences”, IMF Working Paper 11/238
Shim, I, B Bogdanova, J Shek and A Subelyte (2013): “Database for policy actions on housing markets”, BIS Quarterly Review, September, pp 83–95.