IMF: Why house prices are now globally synchronised

By Leith van Onselen

The International Monetary Fund (IMF) has released a new report which shows that global forces have been a major driver of growth in house prices in Australia and abroad over recent decades.

The report notes that house price growth has become increasingly synchronised at both city and country level, particularly since the global financial crisis. The IMF concludes that although local factors continue to be the key influence on house prices, policymakers should be mindful that a domestic property market can be affected by house price shocks in other countries. It also finds that policy measures aimed at cooling housing markets – such as macroprudential controls and stamp duties on foreign buyers – remain effective tools to tame the housing cycle and reduce price synchronicity.

The IMF Blog summarises the full report:

Our study of 44 cities and 40 advanced and emerging-market economies shows that the growing integration of financial markets plays an important role. As a result, housing markets in one country are more sensitive to swings in another. Policy makers should pay attention, because the heightened tendency for house prices to move in tandem may signal greater odds of an economic slowdown. An economic shock in one part of the world is more likely to affect housing markets elsewhere…

Let’s look at why home prices are more synchronized in a financially integrated world.

  • Interest rates: The world’s major central banks have kept interest rates unusually low for a long time in a bid to stimulate growth. That has produced a ripple effect of low borrowing costs, including cheap mortgages, across the globe, which has helped push up prices.
  • Institutional investors, private equity firms, and Real Estate Investment Trusts have been increasingly active in major cities such as Amsterdam, Sydney, and Vancouver as they seek out higher returns.
  • Wealthy individuals have also snapped up properties in major financial centers in search of safe places to invest their money (and perhaps to live). One result: because the wealthy prefer high-end properties, their investments push up prices in expensive neighborhoods in places like New York and London at the same time.
  • Economic growth: In addition to financial factors, coordinated movements in the real economy contribute to the phenomenon. In 2017, growth picked up in 120 economies, accounting for three-quarters of world GDP. It was the broadest synchronized growth surge since 2010. Economic growth is a major driver of demand for homes, and hence prices.

All of this suggests that house prices are starting to behave more like the prices of financial assets, such as stocks and bonds, which are influenced by investors elsewhere in the world. In countries that are more open to global capital flows, prices of both homes and equities tend to be more synchronized with global markets.

Policy responses

But there’s a significant difference. Homes represent the biggest asset for most families (as well as the biggest liability, in the form of a mortgage.) And banks invest heavily in real estate loans, making them vulnerable to swings in home prices. So, policy makers should keep a close eye on synchronous moves in home prices, especially when housing market activity or valuations are considered excessive. Fortunately, our research also shows that policy actions to cool down hot housing markets remain effective and can have the additional benefit of taming house price synchronicity. Such actions include raising property taxes and stamp duties and limiting the size of a home loan in relation to a home’s value.

More broadly, policies that enhance resilience to global financial shocks may help. These include flexible exchange rates, which give policy makers more control over domestic borrowing costs, as well as policies to protect consumers against excessive indebtedness during housing busts.

Separately, in the full report, the IMF provides the below analysis supporting macroprudential measures aimed at taming the housing cycle:

…macroprudential policies seem to retain some ability to influence local house price developments even in countries with highly synchronized housing markets, and that macroprudential policy measures put in place to tame rising vulnerabilities in a country’s financial sector may have the additional effect of reducing a country’s house price synchronization with the rest of the world. These unintended effects are worth considering when evaluating the trade-offs of implementing macroprudential and other policies…

House price growth seems to evolve differently after the adoption of demand-side macroprudential policies, such as loan-to-value limits, depending on the level of synchronicity (Figure 3.4.1, panel 1). Before the adoption of these policies, house prices grow similarly in countries with high or low house price synchronicity. After they are adopted, house price growth declines in both groups of countries, but the decline is stronger and more sustained in low-synchronicity countries. These simple patterns suggest that policymakers may have more control over the dynamics of the housing market in these countries. At the same time, they suggest that a high degree of synchronicity does not render macroprudential policies ineffective. This could be the case if the financial factors behind house price synchronization operate at least partially through local financial intermediaries.

Macroprudential tools are also associated with a reduction in house price synchronicity (Figure 3.4.1, panel 2).3 Since these tools mostly affect local financial intermediaries and domestic demand, this finding also suggests that factors driving house price comovement operate, at least partially, through these channels. The relationship between capital-based measures, which include countercyclical capital buffers, and house price synchronicity seems the most negative. Likewise, loan-targeted measures, including loan-to-value limits, and supply-side loan-targeted tools, such as limits on foreign currency loans, are found to lessen correlations with the global house price cycle. The adoption of fiscal-based measures, such as ad valorem and buyers’ stamp duty taxes, that could potentially deter global investors from engaging in speculative real estate purchases is also associated with a decline in synchronicity, but to a lesser extent than other macroprudential policies.

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