The IMF’s new Global Housing Watch brings together housing market information to keep track of boom and bust cycles and nudge policymakers to take early action to moderate housing booms.
Housing is an essential sector of every country’s economy, but it has also been a source of instability for financial institutions and countries. Understanding the drivers of house price cycles, and how to moderate these cycles, is important for economic stability.
The new indicators are an important step in assembling country-level data on housing trends in one location, allowing for more transparent cross-country and historical comparisons. The hope is to prompt actions by policymakers to moderate housing cycles.
“The era of benign neglect of housing booms is over,” IMF Deputy Managing Director Min Zhu said in a speech and blog. It is only by maintaining an open dialogue on these issues that we will gain a solid understanding of how policies can contain housing booms.
IMF Survey recently spoke with Prakash Loungani, Advisor in the IMF’s Research Department, who is leading a Fund-wide effort in this area, to learn more about the new web page and its role in the IMF’s work.
IMF Survey: Prakash, can you give us a quick description of this new page on housing markets and how it will function?
Loungani: The first thing I want to emphasize is that this is a launch of an initiative, not the end point. The page is part of a suite of products the IMF is developing. A number of departments in the IMF do work on housing issues. With this page, we will over time give that work one home. The housing web page will also feature a new quarterly update on housing developments to be launched in July.
The page will feature the Global House Price Index, which is a compilation of average housing prices in different countries that tells us if prices are going up globally, as was the case during the 2000s boom. There is also a chart showing countries where house prices have risen over the past year and where they have fallen. We also show how affordable housing is relative to incomes and rents. This data will give IMF country teams a first pass indication of how their country compares on these metrics to other countries.
IMF Survey: Can this information help you predict a housing bust?
Loungani: We don’t have a good early warning system. The best we can do at the moment is to look at a number of different indicators; and if all are flashing red, we need to flag this in our discussion with the country so it can take preventive measures.
With this new Global Housing Watch, we can look at indicators such as the house price-to-income ratio and the house price-to-rent ratio. We will soon add other indicators, such as how fast credit is growing, which could signal a potential bust.
IMF Survey: What’s the advice that the IMF can give a country that appears to be going into unsustainable housing price territory and unreasonable credit growth?
Loungani: We do have a set of policy tools that can help – sometimes these are referred to as “Mip-Map-Mop.” Microprudential (Mip) policies look at an individual bank’s balance sheet, for example to determine if it is making too many real estate loans. But it could be that the individual banks are doing what seems healthy for them, but what the banking system as a whole is doing needs results in an unhealthy growth in lending.
So, in addition, macroprudential regulations (Map), operating at the level of the financial sector as a whole, come into play. The most commonly used measures cap how much individuals may borrow relative to their income. These prudential measures are being increasingly used by countries to prevent an unsustainable build-up in debt.
Finally, there is the monetary policy (Mop) that involves the central bank raising interest rates if they want to cool off the housing sector. This can be tricky, because sometimes the economy is weak but the housing sector is booming, and raising the interest rate can harm the overall economy.
So, basically, we need to share experience across countries, to look at trends, use our judgment, and apply policies that that may help prevent problems in the housing sector.
IMF Survey: Where do you obtain the data for the Index?
Loungani: The data comes from Haver, Global Property Guide, and OECD. We are hoping that over time the data will improve. For example, IMF country teams may look at our Index and let us know of a better source of information for their country. What we have done is a good first pass at pulling together statistics, but eventually countries may point us to better housing statistics.
IMF Survey: When you pulled all of the charts and data together, were there any surprises you didn’t expect?
Loungani: Yes, two things. First, during the recent financial crisis, the house prices in many countries did not fall. It’s important that the IMF keep an eye on this, because we don’t know if that means that good things were going on in those countries or that there is something going on that we should worry about.
The second surprise is that, from this exercise, we realized that our country teams are doing an impressive amount of work on housing, both in terms of quantity and quality. This is an under-exploited resource that we want to spotlight by giving it one home, ensuring some consistency of treatment, and sharing it widely.