Assessing House Prices with Prudential and Valuation Measures

Abstract

In this paper we provide tools for assessing the house prices and housing valuation. We develop two approaches: (i) borrowing capacity approach, and (ii) intrinsic value approach. The borrowing capacity of households, together with their down payment, implies how much housing they can attain. In the intrinsic value approach, property value is viewed as a discounted present value of adjusted net rental income. Our approach does not involve a complex econometric model and only widely available data are used. The proposed indicators can guide households, financial markets and macroprudential authorities in their understanding of house prices development. To illustrate the concepts, we analyze the housing prices in the Czech Republic and assess the degree of market over-and undervaluation.

Assessing House Prices in Canada

“…The "investment" (or arbitrage) approach explicitly acknowledges the expected path of cash flow and it is firmly grounded in economics and finance theory. 6 This paper follows Andrle and Plašil (2019), who operationalize the concept for practical analysis of house prices, reflecting some specifics of owner-occupier households and smaller buy-to-let investors. For instance, it is assumed that that households will fully repay their mortgage, unlike corporate real-estate investors who may keep their leverage stable over time.…”

“…The practical application of the valuation formula (5) explicitly acknowledges the mortgage amortization period, the 5-year intervals for which interest rates are fixed, zero tax deductibility of interest expenses, and the retail investor's desire to fully repay the mortgage in full, see Andrle and Plašil (2019) for the details.…”

“…Following Andrle and Plašil (2019), two approaches are used to assess house prices. The first is the borrowing-capacity approach, a hypothesis that house prices essentially reflect households' capacity to borrow and pay for the purchase of a house.…”

“…The structure of the paper is as follows. First, the static borrowing-capacity approach and investment approach to house prices assessment are described, however consult Andrle and Plašil (2019) for greater detail. Second, the results from applying the methods to eleven census metropolitan areas (CMAs) are discussed, together with the key assumptions behind the analysis.…”

“…Andrle and Plašil (2019) also develop the concept of "dynamic borrowing capacity", where the future path of income and interest rates are reflected in household capacity to borrow, with emphasis on the financial stability and loan repayment when economic conditions deteriorate.©International Monetary Fund. Not for Redistribution…”