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The Long-Term Evolution of House Prices: An International Perspective Canadian Association for Business Economics Kingston, Ontario 25 August 2015 Lawrence Schembri Deputy Governor Bank of Canada Outline Introductory remarks:

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The Long-Term Evolution of House Prices: An International Perspective

Canadian Association for Business Economics Kingston, Ontario 25 August 2015

Lawrence Schembri Deputy Governor Bank of Canada

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Outline

Introductory remarks:

  • Motivation: Housing is important; useful to provide context
  • Approach: Examine house prices across time & countries (Advanced SOEs)

Long-run determinants of house prices:

  • Demand: Macroeconomic, demographic, and credit conditions,
  • Supply: Regulation and geography

Policy implications:

  • Macroprudential policy: effectiveness & complementary role

Key messages

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50 100 150 200 250 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Index Spain United Kingdom Ireland Italy United States

  • b. Real house price index; post-crisis correction

Index: average = 100

50 100 150 200 250 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Index Australia Canada Norway New Zealand Sweden

  • a. Real house price index; no post-crisis correction

Index: average = 100

Real house prices have increased globally since 1995

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Conceptual issues – multiple dimensions

  • Housing is both a consumption good (housing services)

and an asset (store of wealth)

  • Owner-occupied housing versus renting
  • Single-family versus multiple unit
  • Composite good: structure and land
  • Existing versus new house

Focus: owner-occupied; existing singles & multiples; composite price

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Demand Factors

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Demand factors

Macroeconomic

  • Rising disposable incomes; lower long-term real interest rates

Demographic

  • Population growth; migration

Credit conditions

  • Improvements due to financial liberalization and innovation

Other possible factors

  • Macro-policy framework improvements, international investment,

preference shifts and regulatory/tax changes

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80 100 120 140 160 180 200 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Index Australia Canada Norway New Zealand Sweden

  • b. Real personal disposable income

Index: average = 100

80 100 120 140 160 180 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Index Australia Canada Norway New Zealand Sweden

  • a. Nominal house price to income ratio

Index: average = 100

House prices have increased relative to incomes

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0.0 0.2 0.4 0.6 0.8 % Australia Canada Norway New Zealand Sweden

  • b. Net migration to total population

Average annual as a per cent 0.0 0.5 1.0 1.5 % Australia Canada Norway New Zealand Sweden

  • a. Total population growth

Average annual growth rate

Population growth has contributed to house price increases, aided by net migration: 1975-94 and 1995-2014

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0.0 0.1 0.2 0.3 0.4 0.5 % Australia Canada Norway New Zealand Sweden

Urbanization increase: 1975-94 and 1995-2014

Average annual growth rate

Increasing urbanization is important

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Credit conditions for housing finance have eased

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Financial liberalization Financial innovation Lower long-term global interest rates Lower mortgage rates Broader and more efficient access to housing finance A F F O R D A B I L I T Y

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  • 2

2 4 6 8 10 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 % Australia Canada Norway New Zealand Sweden

Real 10-year government bond yields: 1995-2015

Real long-term interest rates have trended downward since 2000

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60 65 70 75 80 85 90 1995 2000 2005 2010 % Australia Canada Norway Sweden

  • b. Home-ownership rates

Canada United States Australia Sweden Norway United Kingdom Netherlands Denmark Italy France Spain 0.0 0.2 0.4 0.6 0.8 1.0 20 40 60 80 100 Index Residential mortgage-debt-to-GDP ratio (2001-06 average, %)

  • a. IMF mortgage market index and ratio of

residential mortgage-debt-to-GDP

Housing finance index, mortgage market depth and home

  • wnership rates

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15 30 45 60 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Securitization share (%) Private Securitization - United States Public/Agency Securitization - United States Private Securitization - Canada Public /Agency Securitization - Canada Total Securitization - Australia

  • b. Mortgage securitization outstanding as

a share of total mortgage credit

50 100 150 200 2 4 6 8 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 % % Canada (left scale) New Zealand (left scale) Australia (left scale) Norway (right scale) Sweden (right scale) Denmark (right scale)

  • a. Covered mortgage bonds outstanding

as a share of total household credit

Mortgage funding by covered bonds and securitization has risen

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Other factors supporting demand for houses

Demand for houses

Macro & financial policy frameworks International investment Shifting preferences Other government policies

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Supply Factors

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Regulatory and physical constraints limit the price responsiveness

  • f housing supply

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Regulation

Land use/zoning regulations Greenbelts Development fees

Geography

Bodies of water Inhospitable terrain

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3 6 9 12 15 18

Detroit Houston Chicago Ottawa Winnipeg Las Vegas Edmonton Saskatoon Calgary Montreal Tokyo New York Toronto Los Angeles London (GLA) Melbourne San Francisco Sydney Vancouver Hong Kong

Median multiple

Median price-to-income ratio and land-use regulation: 2014

More-restrictive regulation (International) More-restrictive regulation (Canada) Less-restrictive regulation (International) Less-restrictive regulation (Canada)

Land-use regulation and geographical constraints increase price-to-income ratio

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House prices rise with increases in urban density: 1995-2014

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Vancouver Toronto Montréal Edmonton Calgary Winnipeg Ottawa Quebec City 100 125 150 175 200 225 250

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  • 10

10 20 30 40 50 60 Price change % Change in population per square kilometre (%)

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With population density increasing and binding supply constraints , multi-unit starts are dominating in Canada’s biggest cities

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1600 6600 11600 16600 21600 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts

  • a. Vancouver

2000 9000 16000 23000 30000 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts

  • b. Montréal

4200 13200 22200 31200 40200 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts

  • c. Toronto

9600 22600 35600 48600 61600 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Single family house starts Multi-unit starts

  • d. Rest of Canada

000s of units 000s of units 000s of units 000s of units

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Policy Implications

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Post-crisis monetary policy in advanced SOEs was effective

Countercyclical MP response to decline in demand Effective MP transmission: credible IT framework & resilient financial system Lower real interest rates boosted domestic demand Stronger demand for houses and rising house prices

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Implications of higher house prices for financial stability

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Two related vulnerabilities:

Associated with household indebtedness and leverage Potential source of house price misalignment

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0.2 0.4 0.6 0.8 1.0 1.2 1975Q1 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1 2015Q1 Ratio Australia Canada Norway New Zealand Sweden

Ratio of household-debt-to-GDP

Household leverage has grown, especially since 1995

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Complementary role of macroprudential policy

Countercyclical monetary policy increases demand for houses Macroprudential policy restricts access to credit to more qualified borrowers Increased borrowing by the most financially capable households

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Macroprudential policy: Effectiveness

Evidence on the effectiveness of loan-to-value and debt-to-income constraints and other policies

Reduce procyclicality of household credit and bank leverage Moderate credit growth Improve quality of borrowers Lower rate of house price appreciation

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Macroprudential tightening in Canada: 2008-12

Maximum amortization (insured mortgages) 40 years 25 years LTV limit for new mortgages 100% 95% LTV limit for mortgage refinancing 95% 80% LTV limit for investment properties 95% 80% Debt-service criteria TDS capped at 45% GDS capped at 39% and TDS ratio at 44%

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10 20 30 40 50 60 70 80 90 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % Under 600 600-659 660-699 700 and over

  • a. Distribution of credit scores at origination

(CMHC high-ratio mortgages)

5 10 15 20 2007 2008 2009 2010 2011 2012 2013 2014 2015 %

  • b. Mortgage credit

Annualized 3-month growth rates

Canadian post-crisis macroprudential policies contributed to higher borrower quality and lower household credit growth

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Key messages

Real house prices have been rising relative to income in Canada and other comparable countries for about 20 years due to:

  • Demand: Demographic forces (population growth, migration),

improving credit conditions, other factors

  • Supply: geography and regulation reduced supply elasticity,

especially in urban areas

Macroprudential policy experience:

  • complementary to monetary policy and
  • better suited to address financial vulnerabilities

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