Business & Economics

Housing market lessons from around the world

Robert Edelstein

The global financial crisis, which originated in US housing and finance markets, has kindled interest in housing markets worldwide. How did housing in other countries fare? How did policymakers deal with the impact of the spreading crisis? National housing markets and financial systems differ significantly across the globe, and these differences are useful for explaining the wide diversity of experiences of different national housing markets during the worldwide financial and economic crisis.  These variations are illustrated in an edited book that my colleagues, Ashok Bardhan, and Cynthia Kroll, and I recently published, entitled, “Global Housing Markets:  Crises, Policies, and Institutions” (Wiley and Sons:  2012).The articles in the book examine housing issues in 20 countries before, during and after the financial crisis of 2008-2009.

The U.S. housing market and mortgage system are variegated and complex, compared to those in other countries.  The U.S. financial institutions offer a wide range of loan choices for borrowers, and harness capital from a variety of sources.  About two-thirds of the U.S. households own their own homes, similar to rates found in many parts of the world, but the U.S. government’s role in housing production is relatively small.  The U.S. housing finance system stands out for having a mortgage interest tax deduction, a relatively high proportion of long-term fixed interest rate mortgage loans, no fees for mortgage prepayments, and a predominance of non-recourse loans (i.e., mortgage secured only by the house, and not the borrower’s other assets).

Different countries’ experiences highlight the tradeoffs between tightly regulated markets, which may offer stability, and more dynamic and flexible systems which may be riskier, but provide opportunities for efficiency, innovation, and growth. For example, the German housing market has much less emphasis on home ownership, strict financial regulations, and has not seen rapid appreciation in homes since a Berlin bubble at the outset of unification. In both Germany and Denmark, covered bonds have provided a steady source of credit for home purchases, while limiting leverage and other types of risk. Ireland’s housing boom and bust came closer to matching the US in severity, exacerbated by massive capital inflows, trade exposure and negative real interest rates. Spain also was severely affected by global linkages, in the shape of foreign demand for vacation homes, as well as by risk-taking by small local savings institutions.

It is clear that global linkages can amplify effects either through financial markets or trade. For example, the impact of the financial crisis on Japan came through the severe contraction of international trade and the negative shocks felt through global credit markets. In contrast, China and Singapore employed government control and ownership of land to alternately dampen surging prices or stimulate the market, sometimes with moderate, at best, success. There appears to be a growing disconnect between incomes and home prices in the many metropolitan areas in China, and pent-up demand and cash-rich state enterprises have further fueled the boom.

In countries where there is household risk sharing through full recourse mortgages, prepayment penalties and the absence of mortgage interest deductions, upswings might be dampened, but the homeownership rate and household mobility may be adversely affected.  Agile and timely regulatory responses can be helpful in either shortening or diminishing the housing bust cycle, and deterring the system from entering into a housing depression.

The study of the experience of housing markets and finance systems from around the world contributes to a better understanding of how economic, historical, regulatory institutional factors as well global linkages influence national economies and housing markets during financial crises, and may help inform US policy going ahead.

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