Hot Property: The Housing Market in Major Cities PDF
Preview Hot Property: The Housing Market in Major Cities
Rob Nijskens Melanie Lohuis Paul Hilbers Willem Heeringa Editors Hot Property The Housing Market in Major Cities Hot Property (cid:129) (cid:129) (cid:129) Rob Nijskens Melanie Lohuis Paul Hilbers Willem Heeringa Editors Hot Property The Housing Market in Major Cities Editors RobNijskens MelanieLohuis DeNederlandscheBank DeNederlandscheBank Amsterdam,TheNetherlands Amsterdam,TheNetherlands PaulHilbers WillemHeeringa DeNederlandscheBank DeNederlandscheBank Amsterdam,TheNetherlands Amsterdam,TheNetherlands ISBN978-3-030-11673-6 ISBN978-3-030-11674-3 (eBook) https://doi.org/10.1007/978-3-030-11674-3 Thisbookisanopenaccesspublication. ©TheEditor(s)(ifapplicable)andTheAuthor(s)2019 OpenAccessThisbookislicensedunderthetermsoftheCreativeCommonsAttribution4.0International License(http://creativecommons.org/licenses/by/4.0/),whichpermitsuse,sharing,adaptation,distribution andreproductioninanymediumorformat,aslongasyougiveappropriatecredittotheoriginalauthor(s) andthesource,providealinktotheCreativeCommonslicenceandindicateifchangesweremade. Theimagesorotherthirdpartymaterialinthisbookareincludedinthebook’sCreativeCommonslicence, unlessindicatedotherwiseinacreditlinetothematerial.Ifmaterialisnotincludedinthebook’sCreative Commonslicenceandyourintendeduseisnotpermittedbystatutoryregulationorexceedsthepermitted use,youwillneedtoobtainpermissiondirectlyfromthecopyrightholder. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthors,andtheeditorsaresafetoassumethattheadviceandinformationinthisbook arebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsorthe editorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforanyerrors oromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictionalclaims inpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG. Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Foreword Amsterdam: the city with the highest house price rises in the Netherlands and, in 2017, also in the Eurozone.1 I live in this city, so I have witnessed these soaring pricesatfirsthand.Likemanycapitalcities,Amsterdamhasledthereboundinthe Dutch housing market, which started in 2013. Prices here began to take off and withinafewyearsweregrowingatannualratesofover15%.Asimilarstorycanbe told about other large cities in the Netherlands. And more recently the rest of the country has followed this trend, albeit at a slower pace, which means that house pricesarenowrisingeverywhere. Mywork takesmeall overtheglobe totheworld’smajorcities, soIhaveseen similarhousingmarketdynamicsinLondon,ParisandBerlin,butalsoWashington, Seoul and Sydney. The book you are about to read comprises views on these developmentsbyleadingacademics,centralbankersandpolicymakersfromacross theglobe. They delve into some serious questions:Do we agree on theanalysisof theproblemsinthisfield?Couldwelearnfromeachother’sbestpractices?Isthere onesolution? Asanurbanresident,ascentralbankpresidentandofcourseasaneconomist,I see both opportunities and challenges. While the increased popularity of cities worldwidemaybegoodnewsfortheseplaces,andforhomeowners,italsocreates issues.Demandforurbanhousingisstronglyoutstrippingsupply.Thisleadstothe surgeinhousingpricesthatweareseeing.Atthesametime,italsoputspressureon rental markets. And although supervisors, central banks and governments have strengthened mortgage regulation since the financial crisis, the risk of a credit- driven boom always looms. After all, homeowners are often willing to take on more debt to be able to live in the city. In the Netherlands, we haven’t yet seen a creditboom,butincountriessuchasNorway,Sweden,BelgiumandFinland,house pricegrowthhasbeenaccompaniedbystrongmortgagegrowth. 1Inrealterms,asof2017:seeECBFinancialStabilityReport,May2017. v vi Foreword Strong price increases are making urban housing affordability a pressing issue everywhere in the world. For central bankers, who are mainly responsible for financial stability, affordability may not always be the most important concern. However,extremeexamplesshowthiscanbecomeaproblemforbroadereconomic well-being:thinkoftheSanFranciscoBayArea,SiliconValleyinparticular,where the average house costs €1.5 million by now. As these areas are booming, many workerscannotaffordtolivethereanymore.Anincreasingliteratureisdocumenting theseconsequencesofdecreasingaffordability,socialaswellaseconomic.Indeed, urban demographics are changing as a result. Young, well-educated people are drawn to cities, often chasing a limited supply of housing. Due to the housing shortage, middle-income households are put at a disadvantage: too rich to qualify forsocialhousing,notrichenoughtobuyahouse. Theyhavetorelyontherental market.However,ifthismarketdoesnotfunctionwell,asisthecaseinmanycities, middle-income families are forced to move out of the city. Moreover, the rise of major cities also leads to increasing divergence between these cities and more peripheral regions. At the same time, spillover effects cause prices to rise in areas surroundingmajorcities.Thisultimatelyaffectsthestructureofeconomicdevelop- ment,whichincreasinglyshiftstourbanareasandawayfromtheperiphery. Majorsupplyshortagesincities,andtoalesserextentinotherpartsofthecountry, areamaindriverofcurrentpricerises.Andasweknowfrompastexperience,strong housepricerisescanleadtoovershooting,oftenfollowedbyacorrection.Thisprice volatility does not remain confined to the housing market. In countries like the Netherlands, Sweden and the UK, with a high rate of home ownership and depen- denceonmortgagelending,housepricevolatilityfeedsintotherealeconomy.The linkbetweenhousepricesandprivateconsumptionisstronghere,andthissymbiotic relationshipcauseseconomicboomstogrowlargerandbuststobedeeper. A more balanced and suitable supply of housing is thus needed. This does not only mean owner-occupied housing but also private rental, especially for middle- incomehouseholds.Asa2017studybyDeNederlandscheBank(DNB)pinpointed, theyareputinatightspotonthehousingmarket.2Alargermid-marketprivaterental segment is the key first step to creating a housing market that is free of such imbalances,especiallyincities.However,alackofplanningandbuildingcapacity, as well as zoning restrictions, is still impeding new-build developments in and around cities. Moreover, lower-tier governments like municipalities lack effective incentives to develop the private rental sector. The Dutch national government is currentlytakingamoreproactive,leadingroletoovercometheseimpedimentsand ensureanappropriatesupplyofnewhouses. For central bankers with a financial stability mandate, these housing market developments posenew challengesfor risk analysis and possible policyresponses. Other policymakers are struggling with these challenges as well. And that is why DNB, in May 2018, organised a seminar that brought together speakers from differentcountriesanddivergentbackgrounds.Thishashelpedtoavoidgroupthink 2“ThehousingmarketinmajorDutchcities”,DNBOccasionalStudy,May2017. Foreword vii and to promote a healthy exchange of views from different perspectives: central banksandpublicbodies,academia,theprivatesectorandrepresentativesfrommajor citiesthemselves. During the seminar, four questions were addressed, which are also reflected in thechapterofthebookthatliesbeforeyou.Thefirstquestioniswhybigcitiesareso popular,andwhetherthispopularityisheretostay.Isthereafundamentaldemand forurbanhousing,andwillitlastfortheyearstocome? Subsequently,thebubblequestionpopsup:doweseeahousingbubbleinthebig citiesandhowdoyoumeasurethis?Ifthereisanythingthefinancialcrisishastaught us,itisthatthereismostcauseforconcernwhenthisbubbleisfuelledbyexcessive creditprovision.Credit-drivenbubblesarethemostdetrimentaltofinancialstability. Curiously,intheNetherlands,thecurrenthousingmarketrecoverydoesnotseemto becreditdriven:housepricesaresurging,butmortgagegrowthisnearzero.Icannot helpbutnoticethatthisatypicaldevelopmentisdrivenbytoday’slowinterestrates. As private investors do not find sufficient return in savings accounts or other safe investments,theyturntothehousingmarket,drivingupprices. After considering housing demand, the supply side of the housing market also needs to be taken into account: what role do supply frictions play in the current environment?Citiesarenotoriouslydense,andexpandingsupplyisthusdifficultin urbanareas.Therefore,evenmorethaninperipheralareas,supplyissuesandpolicy optionsincitiesshouldbestudiedindetail. This brings us to the last topic: which policy actions are needed to effectively addresstheseissues?Untilrecently,macroprudentialpolicymakersfocusedmainly onrestrictingdemand.MeasureslikeLTVlimits,LTIrestrictionsandcapitalrequire- ments should keep mortgage growth, and thus price growth, in check. However, current developments seem less driven by credit and more by fundamentals like populationgrowthandsupplyshortages.Itisthuslikelyweneedtolookfurtherthan ourstandardhousingmarkettoolkit. Theseminarparticipantshaveproducedarichcollectionofpapersthatwillsurely addtoourcollectiveknowledgeonurbanhousingmarkets.Ihopeyouenjoyreading their insights and that this book provides inspiration to tackle the housing market challengesahead. DeNederlandscheBank, KlaasKnot Amsterdam,TheNetherlands July2018 Preface Cities are booming, as are their housing markets. All over the world, people are flocking to cities for the job opportunities, educational facilities and cultural pro- visionstheyoffer—andthesepeopleallneedaplacetolive.Inmanycities,thishas causeddemandforhousingtooutpacesupply,leadingtoasharpincreaseinhousing prices and pressures on rental markets. This development is often accompanied by subduedactivityincountries’moreperipheralregions.Forcentralbanksandother policymakers with a responsibility for financial stability, this trend towards urban- isation and the resulting divergence between cities and other regions poses chal- lengesforbothanalysisandpolicy. Inordertoaddressthesechallenges,DeNederlandscheBankorganisedahigh-level seminaronthehousingmarketinmajorcitiesinAmsterdamonMay24–25,2018.This seminar has yielded many useful insights into the issues at hand, their impact on society,theeconomyandfinancialstabilityandpossiblepolicyresponses.Thefollow- ing18chapters,writtenbytheseminarspeakers,elaborateupontheseinsights.Inthis preface,weidentify10keytakeawaysfromtheseminarandthechaptersinthisbook. Key Takeaways 1. Citiesarebecomingmoreandmorepopularallovertheworld,leadingtoa surgeindemandforurbanhousing. Thehousingboominbigcitiesisuniversalandislargelyattributabletothelure ofbigcities.Citieshavetransformedthemselves:heavyinvestmentshavebeen made in infrastructure and in cultural and recreational facilities. They have become the economic powerhouses of the countries they are in. People are drawn to the cities as cities offer education, jobs, cultural events, creativity, recreational opportunities and of course the presence of other people. Particu- larlyhighlyeducatedyoungpeoplearemigratingtourbancentres.Immigrants insearchofworkandeducationarealsofocusingonthecities,wheretheycan ix x Preface connectwithcommunitiesofthesameorigin.Itisexpectedthatby2100,noless thanbetween80%and90%ofthepopulationwillliveincities(seeChap.1by LisettevanDoornetal.). 2. Capital is currently finding its way to residential property in the cities, spurredbylowinterestratesandasearchforyield. The demand for housing as an investment good, from domestic as well as foreign investors, contributes to the increasing demand for urban housing. Investors see the buy-to-let market as a favourable investment option, as the yieldofabuy-to-letinvestmentisrelativelyhighcomparedtoalternatives.This attracts different sorts of investors, including high net worth individuals, insti- tutionalinvestorsandforeigninvestors.Housepricesinthecitiesthusnotonly reflect the local factors such as supply constraints, regulations and zoning, but alsoglobaltrendslikethegrowingroleofforeigninvestors.Thisphenomenonis called“glocalisation”(seeChap.7byHitesAhirandPrakashLoungani). 3. Housing supply is lagging behind the growing demand for homes in the cities. Supply is only increasing slowly. Suitable land for residential development in citycentresisnotoriouslyscarce,leadingtolargerincreasesinhouseprices(see Chap. 12 by Bahar Öztürk et al.). The lack of suitable land is also caused by administrative building restrictions and the Not In My Backyard (NIMBY) syndrome that is surfacing around the world. Building requires long planning processes, in which many different stakeholders and interests are involved. The governance of new housing construction is complex: cities are subject to different layers of public administration, each with its own authority. Owner- occupied and rental markets cannot be viewed in isolation: demand for rented accommodationisrising,partlyowingtoflexiblemillennialsandexpats,while supply is lacking. Rental regulations play a role here. In Sweden for example, rentsintheregulatedmarketarelow,whichhamperstheturnoverofapartments as people continue to live in their rented accommodation (see Chap. 11 by Kjersti Næss Torstensen and Kasper Roszbach). In the Netherlands, the non-regulatedrentalsectorisunderdeveloped:thesupplyofmid-marketprivate rentalhousingfallsshortofdemandinlargecities,whichispartlybecausesocial rentalandowner-occupiedhousingaresubsidised(seeChap.3byRobNijskens andMelanieLohuis).Inthediscussionaboutlaggingsupply,it’sgoodtokeep inmindthatthereisadifferencebetweenshort-termandlong-termsupply(see Chap. 9 by Albert Saiz). Short-term supply is very inelastic, leading to rising prices when demand is increasing. Often, real house prices are expected to continue rising permanently, which is irrational as supply will catch up with demandinthelongterm. 4. These factors together are causing affordability problems for middle- incomeearners. Risinghousepricesandrentsinthemajorcitiesareputtingordinaryinhabitants, wholiveinaprivaterentalhouseoraretryingtobuytheirfirsthomes,inatight spot.InAmsterdam,it’sdifficultforfamilieswithchildrentofindanaffordable Preface xi larger home, which is why these families leave the city. Meanwhile, young people often turn to shared homes or small studios to live in (see Chap. 10 by LaurensIvens).InLondon,hugeaffordabilityproblemshavearisen(seeChap.2 by Jamie Ratcliff):more than one-quarter of Londoners live inpovertyif their housingexpensesareincluded. 5. Housepricesinthecitiesareoftenleadingtherestofthecountry. House price fluctuations in capital cities tend to be more volatile and stronger than in the rest of the countries and have a tendency to overshoot. Cities are often experiencing house price changes ahead of other regions. Such a ripple effectcanbeobservedinLondonandParis(seeChap.5byJohnMuellbauer).In theNetherlands,thisisthecaseaswell:whereashousepricesinthemajorcities are soaring, the housing market in the regions surrounding these cities is now gainingstrongmomentumaswell. 6. Next to similarities, there are also differences between countries, among othersinstructuralhousingmarketcharacteristics. Countriesforinstanceshowdifferentpoliticalandculturalpreferences:insome countries(e.g.Germany)peoplepreferrentingtobuying.Rules,regulationsand policies also differ between countries, for example with respect to the rental market. While there is virtually no rental protection in the USA and the UK, tenantsintheNetherlandsarewellprotected.Inaddition,inAustralia,Canada andLondon,foreigninvestorsplayalargerole,whereastheirroleinParisand Amsterdamislesssignificant.Otherstructuralcharacteristicsthatdifferarefor example taxation (e.g. property taxes, stamp duty taxes, mortgage tax deduct- ibility),thepreferenceforfixedorfloatingratemortgagesandtheliquidityofthe housingmarket.Thesekindsofdifferencescontinuetoplayasignificantrolein shaping house price dynamics and can explain differences in the amplitude of housingcyclesbetweencountries(seeChap.6byLaurentClerc). 7. In some countries, the house price boom is accompanied by booming lending,butcertainlynoteverywhere. In Australia, price-to-income and debt-to-income ratios are increasing, and interest-only loans are popular. In addition, a substantial growth in investor lendingcanbeobservedthere,whichraisesconcernsaboutprocyclicalbehaviour of housing investors (see Chap. 17 by Michele Bullock and David Orsmond). Notinallcountriesrisinghousepricesareaccompaniedbyasurgeinlending.In theNetherlandsforexample,mortgagelendinggrowthhasremainedsubduedto date.Whereastheremightbelittledangerofbubblesandcrisesintheabsenceof lendinggrowth,possiblefuturebubblescontinuetobedifficulttoidentify. 8. Macroprudential policies aimed at the housing market definitely have an impact,butareinsufficientontheirown. Sincespillovereffectsfromthecitiestotherestofthecountrycanbeobserved, onemightthinkofimplementingmacroprudentialpolicytoaddressvulnerabil- ities. Macroprudential policies may contribute towards curbing price rises and debtaccumulation,butwilloftennotbesufficienttocounterimbalances.Thisis because the vulnerabilities on the housing market in the major cities are
The list of books you might like
