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Property Prices and Real Estate Financing in a Turbulent World SUERF2013_4.book Page 1 Tuesday, December 3, 2013 2:17 PM Property Prices and Real Estate Financing in a Turbulent World SUERF2013_4.book Page 2 Tuesday, December 3, 2013 2:17 PM SUERF2013_4.book Page 3 Tuesday, December 3, 2013 2:17 PM PROPERTY PRICES AND REAL ESTATE FINANCING IN A TURBULENT WORLD Edited by and Introduction by Morten Balling & Jesper Berg Chapters by Per Callesen Radu S. Tunaru Giovanni Dell’Ariccia and Deniz Igan Margarita Rubio and José Carresco-Gallego Ronan Lyons Kevin Lansing and Marius Jurgilus Morten Bækmand Nielsen, Jesper Berg, Christian Sinding Bentzen and Hendrik Schönemann Alan Boyce, R. Glenn Hubbard, Christopher Mayer and James Witkin SUERF – The European Money and Finance Forum Vienna 2013 SUERF Study 2013/4 SUERF2013_4.book Page 4 Tuesday, December 3, 2013 2:17 PM CIP Property Prices and Real Estate Financing in a Turbulent World Editor: Morten Balling & Jesper Berg Authors: Morten Bækmand Nielsen, Jesper Berg, Christian Sinding Bentzen, Henrik Schönemann, Alan Boyce, R. Glenn Hubbard, Christopher Mayer, James Witkin, Per Callesen, Giovanni Dell’Ariccia, Deniz Igan, Kevin J. Lansing, Marius Jurgilus, Ronan Lyons, Margarita Rubio, José Carrasco-Gallego, Radu Tunaru Keywords: Chapter 2: Housing bubbles, housing prices, household debt Chapter 3: Commercial real estate, United Kingdom Chapter 4: Real estate booms, bubbles, financial and macroeconomic stability Chapter 5: Real estate credit, monetary policy, welfare, DSGE, LTV Chapter 6: Ireland, housing market cycle, property ladder, amenity prices Chapter 7: Housing bubbles, household debt, foreclosures, Norway, United States Chapter 8: Mortgages, EU, mortgage models, housing-related debt Chapter 9: Accelerated amortization, mortgage delinquency, refinancing, impact to tax payers JEL Codes: G21, R21, R31, R38 Vienna: SUERF (SUERF Studies: 2013/4) – December 2013 ISBN: 978-3-902109-70-5 © 2013 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose. SUERF2013_4.book Page 1 Tuesday, December 3, 2013 2:17 PM 1 TABLE OF CONTENTS List of Authors. 5 1. Introduction . 7 Morten Balling and Jesper Berg 2. Property Prices, Debt and Financial Stability . 13 Per Callesen 2.1. Housing Bubbles . 13 2.2. The Impact of House Price Fluctuations . 14 2.3. Key Factors Driving House Prices . 16 2.4. Household Debt, Arrears and Loan Impairments . 21 2.5. Conclusions. 26 3. The Fundamental Economic Term of Commercial Real-Estate in UK 27 Radu Tunaru 3.1. Background. 27 3.2. The Up and Down of the Commercial Property Market . 28 3.3. The Fundamental Economic Term of Commercial Real-Estate in the UK. 30 3.4. Using the Fundamental Economic Term for Policy Making. 35 3.5. Final Discussion . 38 References . 38 4. Dealing with Real Estate Booms . 41 Giovanni Dell’Ariccia and Deniz Igan 4.1. Introduction . 41 4.2. The State of Knowledge on Real Estate Markets and Linkages to the Economy . 42 4.3. The Case for Policy Action on Real Estate Booms . 46 4.3.1. Leverage and the Link to Crises . 46 4.3.2. Wealth and Supply-side Effects . 47 4.3.3. Illiquidity, Opacity, and Network Effects . 47 4.4. Policy Options. 48 4.4.1. Monetary Policy . 49 4.4.2. Fiscal Tools. 50 4.4.3. Macroprudential Regulation . 51 4.5. Who Should Control the Macroprudential Lever?. 56 4.6. Concluding Remarks . 59 References . 60 larcier SUERF2013_4.book Page 2 Tuesday, December 3, 2013 2:17 PM 2 PROPERTY PRICES AND REAL ESTATE FINANCING IN A TURBULENT WORLD 5. Restrictions to Credit on Real Estate: Implications for Monetary Policy and Welfare. 63 Margarita Rubio and José A. Carrasco-Gallego 5.1. Introduction . 64 5.2. Evidence . 66 5.3. The Model. 68 5.4. Simulation . 69 5.5. Welfare Measure . 71 5.5.1. Welfare Comparison Across Taylor rules (No LTV Rule) . 72 5.5.2. The LTV Rule Interacting with the Taylor Rule . 72 5.6. Conclusion . 73 References . 74 6. Inside a Bubble and Crash – Evidence from the Valuation of Amenities. 77 Ronan C. Lyons 6.1. Introduction . 77 6.2. Theory & Related Literature . 79 6.2.1. Economic Theory . 79 6.2.2. Literature . 80 6.2.3. Categories of Amenities. 82 6.3. Data . 82 6.3.1. Advertised Prices . 82 6.3.2. Location . 84 6.3.3. Property Attributes . 85 6.3.4. Location-specific Attributes. 87 6.4. Model . 89 6.4.1. General Specification. 89 6.4.2. Amenity Variables. 90 6.5. Results. 91 6.5.1. Valuation of Amenities . 91 6.5.2. Valuations over the Market Cycle. 93 6.6. Concluding Thoughts . 96 References . 97 7. Housing Bubbles and Expected Returns to Homeownership – Lessons and Policy Implications. 101 Marius Jurgilas and Kevin J. Lansing 7.1. Introduction . 101 7.2. Fundamentals versus Bubble . 102 larcier SUERF2013_4.book Page 3 Tuesday, December 3, 2013 2:17 PM TABLE OF CONTENTS 3 7.3. Can Lower Risk Premiums Explain the Run-up?. 104 7.4. Bubble Evidence: High Expected Returns Near Market Peak 105 7.5. Applying U.S. Lessons to Norway . 107 7.6. Policy Implications . 117 References . 123 8. A Heavenly Match or Recent Developments in Mortgage Lending in the EU and Some Tentative Reflections on its Positioning in the Financial Structure. 129 Jesper Berg, Christian Sinding Bentzen, Morten Bækmand Nielsen and Henrik Schönemann 8.1. A Primer on banking instability and structural remedies . 131 8.2. Mortgage Lending in the EU During the Financial Crisis. 134 8.3. The Diversity of Mortgage Models . 141 8.4. Ratings of Covered Bonds . 146 8.5. An Assessment of Mortgage Models . 151 8.5.1. Affordability . 151 8.5.2. Resilience towards falling property prices . 152 8.5.3. Robustness during and after periods of financial stress 153 8.5.4. Government Intervention . 155 8.6. Concluding Remarks . 156 References . 159 9. The Case for Accelerated Amortization . 161 Alan Boyce, R. Glenn Hubbard, Christopher Mayer and James Witkin 9.1. Background. 161 9.2. An Example. 162 9.3. Net Impact to Taxpayers. 165 9.4. Discussion of the Results . 166 9.5. Conclusion . 167 Appendix Tables . 168 Appendix Figures. 169 SUERF – Société Universitaire Européenne de Recherches Financières . 171 SUERF Studies. 171 larcier SUERF2013_4.book Page 4 Tuesday, December 3, 2013 2:17 PM SUERF2013_4.book Page 5 Tuesday, December 3, 2013 2:17 PM 5 LIST OF AUTHORS Morten BALLING Professor Emeritus of Finance in the Department of Economics and Business Studies at Aarhus School of Business and Social Sciences, Aarhus University and SUERF Managing Editor Jesper BERG Senior Vice President at Nykredit Realkredit A/S, Copenhagen Morten BÆKMAND NIELSEN Head of Investor Relations, Nykredit Realkredit A/S, Copenhagen Alan BOYCE Chief Executive Officer, Absalon, California Per CALLESEN Governor, Danmarks Nationalbank José CARRASCO-GALLEGO Professor, Universidad Rey Juan Carlos, Madrid Giovanni DELL’ARICCIA Head, Macro-Financial Linkages Unit, Research Department, International Monetary Fund, Washington DC R. Glenn HUBBARD Dean and Russell Carson Professor of Finance and Economics at Columbia Business School Deniz IGAN Economist, Macro-Financial Linkages Unit, Research Department, International Monetary Fund, Washington DC Marius JURGILAS Researcher, Research Unit, Norges Bank Kevin J. LANSING Research Adviser in the Economic Research Department of the Federal Reserve Bank of San Francisco and Visiting Economist in the Monetary Policy Research Department, Norges Bank Ronan LYONS Assistant Professor of Economics, Trinity College, Dublin larcier SUERF2013_4.book Page 6 Tuesday, December 3, 2013 2:17 PM 6 PROPERTY PRICES AND REAL ESTATE FINANCING IN A TURBULENT WORLD Christopher MAYER Paul Milstein Professor of Real Estate, Finance and Economics at Columbia Business School and Visiting Scholar at the Federal Reserve Bank of New York Margarita RUBIO Lecturer, School.
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