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Real Estate Markets and Macroprudential Policy in Europe
Philipp Hartmann European Central Bank
Dallas, Texas 14 November 2013
Disclaimer: Any views expressed are only the speaker’s own and should not necessarily be regarded as views of the ECB or the Eurosystem.
Panel on “Lessons Learnt and Implications for Policy” at the Fed Dallas/IMF/Journal of Money, Credit and Banking conference on “Housing, Stability and the Macroeconomy”
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Introduction
Governing Council
• Lesson from economic history (current crisis “refresher”) • Housing bubbles or imbalances in real estate markets often
preceded systemic financial crises (overview Crowe et al. 2013) • Potential reasons (not so well researched!?)
• Asset that many agents in the economy possess → systemic, potentially large real effects
• Credit financed through leveraged lenders → worse crises and downturns • Sluggish supply, slow price discovery and high transaction costs lead to long
large swings in property prices (“illusions” in upturns) • Indivisibility weighs further on prices in downturns
• Area of primary attention for macroprudential policy • Additional challenge: Social and tax policies fostering home
ownership and debt/credit may go in the opposite direction
2
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Outline
Governing Council
• Real estate price developments before and during the crisis • Macroprudential regulatory instruments against real estate bubbles • Concluding remarks • Annex
3
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EU residential property price developments: “Boom-bust” countries (7)
Governing Council
4
0.00
50.00
100.00
150.00
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250.00
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
2003
Q3
2003
Q4
2003
Q1
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Q2
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2012
Q2
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Q3
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2012
Denmark
Greece
Italy
Ireland
Spain
Netherlands
United Kingdom
Levels normalised to 100 for Q1 2002
Source: ECB calculations and DataStream
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EU residential property price developments: Other countries (8)
Governing Council
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0.00
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Q1
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2011
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2011
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2011
Q1
2012
Q2
2012
Q3
2012
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2012
Belgium
Austria
Finland
Germany
France
Sweden
Portugal
Switzerland
Levels normalised to 100 for Q1 2002
Source: ECB calculations and DataStream
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Comparison of EU and US residential property price developments: Selected countries and states
Governing Council
6
Normalised to 100 for December 1996
Source: ECB calculations and DataStream
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Share of European countries in a high- or low-growth residential property price regime
Governing Council
7
Source: ECB calculations, based on Corradin and Fontana (2013)
Percentage of total number of countries (13)
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Macroprudential regulatory instruments for addressing problems in real-estate markets
Governing Council
• Systemic Risk (ECB 2009) • Risk that financial instability becomes so widespread that it impairs the
functioning of a financial system to the point where growth and welfare suffer materially
• Macroprudential policy • Supervision: Public oversight that aims at identifying and containing systemic
risks • Regulation: Public regulations that aim at maintaining systemic stability
• Instruments against widespread imbalances in real-estate markets • Targeting banks: Sectoral capital requirements
• Direct: Pillar 1 – Systemic risk buffer, subsidiarity case for own funds; Pillar 2
• Indirect: Pillar 1 or 2 – higher risk weights (RWs) or higher loss given default (LGDs)
8
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Macroprudential regulatory instruments for addressing problems in real-estate markets (cont.)
Governing Council
• Instruments against widespread imbalances in real-estate markets (cont.) • Targeting borrowers:
• Loan-to-value limits (LTVs) • Loan-to-income (LTIs), debt-to-income limits (DTIs) or debt-service-
to-income limits (DTSIs)
• Memorandum item: Broader instruments against the build-up of
widespread financial imbalances • Countercyclical capital buffer • Balanced accounting approaches • Dynamic provisioning • Influence compensation practices • Leverage ratio • Maximum loan amortisation period • Sectoral concentration limits (sectoral) risk weights
9
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Allocation of policy competencies for macroprudential real-estate instruments in Europe
Governing Council
• EU legislation (all countries) • Capital Requirements Directive (CRDIV) and Capital Requirements
Regulation (CRR) • Sectoral capital requirements, RWs, LGDs • Applied by the competent or designated national supervisory authority • Single Supervisory Mechanism (SSM; first leg of Banking Union) at the
ECB can make those measures more restrictive (but not relax them)
• National legislation (countries that have it; highly “distributive”) • LTVs (16 countries) • DTIs (6 countries), LTIs (2 countries) or payment to income limits (PTIs, 3
countries) • Primary purpose can also be consumer protection (3 countries), bank
solvency requirements (4 countries) or link between loan and funding instrument (2 countries) → not actively changeable by macropru authority
• Policy issues: Active time variation (Mendicino 2012) and cross-country coordination (see common component before) 10
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Policy effectiveness of macroprudential real-estate instruments
Governing Council
• General problem: Limited experience about macroprudential effectiveness or unintended side effects
• Sectoral capital requirements • More bank resilience, less “leaning” • Circumvention possible through unregulated or foreign institutions, reduction of
other activities and off-balance sheet activities etc. • Less effective when capital in excess of regulatory minimum • Experience: Mixed – some effective, some ineffective cases
• LTVs, LTIs, DTIs, DSTIs • Direct limits to real-estate lending demand, household leverage and bank risks • Circumvention possible through splitting of loans or under-reporting etc. • Socially charged (noticeable effect on less wealthy, no borrower differentiation),
sometimes governments in charge not supervisors • Experience: A number of effective cases, but effects can vanish over time
11
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Concluding remarks
Governing Council
• Historical importance of real-estate markets for systemic crises • Surveillance systems in place at the ECB (see e.g. FSR) • New institutional framework for macroprudential policy in Europe is
also taking shape • Substantial work by the European Systemic Risk Board about
policy instruments • Some evidence of effectiveness, but experiences still limited
• Are instruments strong enough? How bad are negative side effects? • Will they be used to “lean” (“distributive” effects, role of governments)? • Can/should LTVs/DTIs be made dynamic and coordinated across Europe?
• Role of monetary policy? Other policies? • At present the priority in the (whole) EU is to recover from the crisis • But a few countries already have high or rising property prices
12
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References 1
Governing Council
• Campbell, Ramadorai and Ranish (2012), How do regulators influence mortgage risk? Evidence from an emerging market, mimeo., Harvard University
• Corradin and Fontana (2013), House price cycles in Europe, forthcoming ECB Working Paper
• Crowe, Dell’Ariccia, Igan and Rabal (2013), How to deal with real estate booms: Lessons from country experiences, Journal of Financial Stability
• Duca, Muellbauer and Murphy (2011), House prices and credit constraints: Making sense of the U.S. experience, Economic Journal
• European Central Bank (2009), The concept of systemic risk, Financial Stability Review, December
• Hall, Psadarakis and Sola (1997), Switching error-correction models for house prices in the United Kingdom, Economic Modelling
13
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References 2
Governing Council
• Mendicino (2012), Collateral requirements: Macroeconomic fluctuations and macroprudential policy, Banco de Portugal Working paper, no. 1211
• Oxford Economics (2009), Developing analytical methods for the identification of imbalances and risks in the EU housing markets, Final Report, September
14
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Annex
Governing Council
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EU residential property price developments: All countries in the sample (15)
Governing Council
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Levels rates normalised to 100 for Q1 2002
0.00
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Q1
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Q1
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Q4
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Q1
2011
Q2
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Q4
2011
Q1
2012
Q2
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Q3
2012
Q4
2012
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
Switzerland
United Kingdom
Source: ECB calculations and DataStream
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Governing Council
17
Percentage of total number of countries (13)
Share of European countries with house prices persistently above fundamental-based values
Source: ECB calculations, based on Corradin and Fontana (2013)
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European countries in a high- or low-growth residential property price regime
Governing Council
18
High-growth red and low-growth blue
Source: ECB calculations, based on Corradin and Fontana (2013)
BE 0 0 0 0 0 • • • • • • • • • • • • • • 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0CH 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 • • • • • • • • • •DE 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 • • • • • • • •DK 0 0 0 0 • • • • • • • • • • 0 0 0 0 0 0 0 0 ♦ ♦ ♦ 0 0 0 0 0 0 0 0 ♦ ♦ ♦ ♦ ♦
FI 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0FR • • • • • • • • • • • • • • • 0 0 0 0 0 0 0 ♦ ♦ ♦ ♦ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0IE 0 0 • • • • • • • • • • • • • • 0 0 0 0 0 0 0 ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦IT 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦
NL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦NO 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0ES • • • • • • • • • • • • • • • 0 0 0 0 0 ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦SE 0 0 0 0 0 • • • • • • • • • • 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0UK • • • 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ♦ ♦ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2003 Q
1
2003 Q
2
2003 Q
3
2003 Q
4
2004 Q
1
2004 Q
2
2004 Q
3
2004 Q
4
2005 Q
1
2005 Q
2
2005 Q
3
2005 Q
4
2006 Q
1
2006 Q
2
2006 Q
3
2006 Q
4
2007 Q
1
2007 Q
2
2007 Q
3
2007 Q
4
2008 Q
1
2008 Q
2
2008 Q
3
2008 Q
4
2009 Q
1
2009 Q
2
2009 Q
3
2009 Q
4
2010 Q
1
2010 Q
2
2010 Q
3
2010 Q
4
2011 Q
1
2011 Q
2
2011 Q
3
2011 Q
4
2012 Q
1
2012 Q
2
2012 Q
3
2012 Q
4
2013 Q
1
2013 Q
2
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EU commercial property price developments: 14 countries
Governing Council
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0
50
100
150
200
250
300
350
400
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
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Q3
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Q4
2003
Q1
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Q2
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Q3
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Q4
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Q1
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Q1
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Q1
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Q2
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Q3
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Q4
2007
Q1
2008
Q2
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Q3
2008
Q4
2008
Q1
2009
Q2
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Q3
2009
Q4
2009
Q1
2010
Q2
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Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Austria
Belgium
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Luxembourg
Netherlands
Poland
Levels rates normalised to 100 for Q1 2002
Source: Jones Lang LaSalle
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EU commercial property price developments: “Boom-bust” countries (12)
Governing Council
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0
50
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150
200
250
300
350
400
Q1
2002
Q2
2002
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2002
Q4
2002
Q1
2003
Q2
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Q3
2003
Q4
2003
Q1
2004
Q2
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Q1
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Q1
2006
Q2
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2006
Q1
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2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Finland
Greece
Hungary
Ireland
Netherlands
Poland
Spain
Sweden
United Kingdom
France
Czech Republic
Denmark
Levels rates normalised to 100 for Q1 2002
Source: Jones Lang LaSalle
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EU commercial property price developments: Other countries (6)
Governing Council
21
0
20
40
60
80
100
120
140
160
180
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
2003
Q3
2003
Q4
2003
Q1
2004
Q2
2004
Q3
2004
Q4
2004
Q1
2005
Q2
2005
Q3
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Q1
2006
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Q1
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Q2
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Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Austria
Belgium
Germany
Italy
Luxembourg
Portugal
Levels rates normalised to 100 for Q1 2002
Source: Jones Lang LaSalle
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Likely designated macroprudential authorities in EU countries and their real-estate instruments 1
22
Austria Belgium Bulgaria Croatia Cyprus Czec Republic Denmark Estonia Finland
(Likely) Designated
authority (main one)
Financial Market
Authority
National Bank of Belgium
Bulgarian National
Bank
New macroprudential body
N.A. Czech National Bank
The Minister of Business and Growth
Eesti Pank Financial
Supervisory Authority
Instruments
European legislation Sectoral capital requirements, risk weights, losses given default
National legislation None
Government responsible for LTV, DTI
To be defined
To be defined N.A. Any useful
instrument None
To be defined (maybe LTV, LTI,
maximum amortisation period
for loans)
To be defined (maybe LTV)
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
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Likely designated macroprudential authorities in EU countries and their real-estate instruments 2
23
France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta
(Likely) Designated
authority (main one)
Haut Conseil de Stabilite Financiere
Federal Financial
Supervisory Authority
Bank of Greece
Magyar Nemzeti
Bank
Central Bank of Ireland
Banca di Italia To be defined Bank of Lithuania Systemic Risk Council*
To be defined
Instruments
European legislation Sectoral capital requirements risk weights, losses given default
National legislation
LTV, LTI/DTI, loan rates and
maturity None Any useful
instrument
LTV, PTI, deposit
coverage ratio,
balance-sheet
coverage ratio, FX funding
adequacy ratio
To be defined To be defined To be defined LTV, DTI and LTD Any useful instrument To be
defined
* composed of the Ministry of Finance, BCL, CSSF and the Commissariat aux Assurances
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
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Likely designated macroprudential authorities in EU countries and their real-estate instruments 3
24
Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom
(Likely) Designated
authority (main one)
De
Nederlandsche Bank
Systemic Risk Board*
Banco de Portugal
To be defined
National Bank of Slovakia
Committee of Financial Stability
Financial Stability
Council** To be defined
Bank of England Financial Policy
Committee
Instruments
European legislation Sectoral capital requirements, risk weights, losses given default
National legislation None None Any useful
instrument To be
defined Any useful instrument To be defined To be defined To be defined
FPC may make recommendations on any measure to
enhance the resilience of the UK
financial system
* composed of NBP, Minister of Finance, FSA, Bank Guarantee Fund, the Prime Minister and the Central Statistic Office
** composed of Bank of Spain, CNMV, General Directorate for Insurance and Pension Funds, the Government
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
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National macroprudential real-estate instruments in the European Union 1
25
Austria Belgium Bulgaria Croatia Cyprus Czec Republic Denmark Estonia Finland
Instruments
Available None LTV, DTI LTV, DTI
Recommendation to
banks for a celiling on customers’
loan indebtednes
s
N.A. None
LTV for loans by mortgage
credit banks and for covered bonds
issued by universal
banks
None None
Used None None LTV, DTI None N.A. None LTV (see above) None None
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
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National macroprudential real-estate instruments in the European Union 2
26
France Germany Greece Hungary Ireland Italy Latvia Lithuania Lux. Malta
Instruments
Available
LTV, LTI,/DTI, controls on
loan rates and maturities
(presently non-binding)
None
Payment-to-income ratio
(PTI, guideline)
LTV, PTI, Income-limit for
FX loans LTV, LTI LTV
LTV (for consumer protection)
LTV, DTI None None
Used
LTV, LTI,/DTI, controls on
loan rates and maturities (see
above)
None PTI LTV, Income-
limit for FX loans
None None None LTV, DTI None None
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
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National macroprudential real-estate instruments in the European Union 3
27
Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom
Instruments
Available LTV, DTI
LTV, DTI, (both non-binding)
Increased risk weight
for FX loans (binding)
LTV, LTI, DTI LTV LTV None
LTV, dynamic
provisioning
LTV, risk weight floor under pillar 2
Capital requirements
Used LTV, DTI LTV, DTI,
risk weights (see above)
None LTV LTV None Dynamic provisioning
LTV, risk weight floor (see above) None
Source: Unpublished results of ESRB survey on macroprudential instruments (August 2013)
