Housing Dynamics over the Business Cycle

Abstract

Housing construction, measured by housing starts, leads GDP in a number of countries. Measured as residential investment, the lead is observed only in the United States and Canada; elsewhere, residential investment is coincident. Variants of existing theory, however, predict housing construction lagging GDP. In all countries in the sample, nominal interest rates are low ahead of GDP peaks. Introducing long-term nominal mortgages, and an estimated process for nominal interest rates, into a standard model aligns the theory with observations on starts, as mortgages transmit nominal rates into real housing costs. Longer time to build makes residential investment cyclically coincident. * Manuscript

Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

“…Robstad (2014) uses Bayesian VARs with Norwegian data and …nds that monetary policy tightening has a small negative e¤ect on household credit, but leads to an increase in the household debt-to-income ratio, in line with our …ndings using the DSGE model. 10 Third, Kydland et al (2012) and Garriga et al (2013) analyze the e¤ects of …xed-rate mortgages for business cycles and the transmission of monetary policy in a general-equilibrium setting. Our set-up is most similar to these papers, although there are several important di¤erences.…”

“…In addition, we consider the e¤ects of alternative policy tools such as …scal and macroprudential policies in our paper, and estimate model parameters related to dynamics, rather than calibrate them. 11 Gelain et al (2014), in simultaneous but independently developed work, also use the long-term debt structure introduced in Kydland et al (2012) to analyze the e¤ects of monetary policy on household debt. Our paper di¤ers from theirs in several respects as well.…”

“…There are two types of households in the economy: patient households (savers), and impatient households (borrowers), similar to Iacoviello (2005). Unlike Iacoviello (2005), we consider long-term mortgages, di¤erentiate between the ‡ow and the stock of household debt, and impose the borrowing constraint on the ‡ow of household debt instead of on the stock, following Kydland et al (2012) and Garriga et al (2013). We extend their set-up in several directions: (i) the interest rate on mortgages can be adjusted more frequently than the full amortization of the loan, thus capturing the e¤ects of adjustable-rate mortgages and re…nancing in the data; (ii) new mortgage loans …nance not only the residential investment of borrowers, but also their consumption expenditures through home equity withdrawals; and (iii) the model features housing-related taxation (i.e., mortgage interest deduction and property taxation), as in Alpanda and Zubairy (2013), and LTV regulation alongside monetary policy.…”

“…Thus, given our set-up, it may not be optimal to try to reduce the level of household debt in the …rst place. Nevertheless, our current set-up captures an important macroeconomic 3 types of households, as in Iacoviello (2005), but mortgage loans are amortized over the long term, similar to Kydland et al (2012) and Garriga et al (2013), thereby allowing us to di¤erentiate between the ‡ow and the stock of household debt. This is key for di¤erentiating the e¤ects of policies that apply only to new lending (e.g., regulatory LTV) as opposed to all existing mortgage debt (e.g., mortgage interest deduction).…”

Housing and the business cycle in South Africa

“…Besides this, there exists a couple of other studies that have looked into the effect of real house prices on per capita economic growth at the provincial-level in South Africa using 1 See for instance, Leamer (2007), Fisher (2007), (Silos, 2007), Goodhart and Hofmann (2008), , Álvarez et al, (2010), Bulligan (2010), Bandt et al, (2010), Ferrara and Koopman (2010), , Ferrara and Vigna (2010), Ghent and Owyang (2010), Iacoviello (2010), Iacoviello and Neri (2010), Iacoviello and Pavan (forthcoming), Kiyotaki et al, (2011), Cinquegrana (2012, Kydland et al, (2012),. Note, however, there also exists a few studies, such as: Benhabib et al (1991), Greenwood and Hercowitz (1991), McGrattan, et al, (1997), Gomme et al (2001), Davis and Heathcote (2005), Iacoviello (2002Iacoviello ( , 2005 which had also emphasized the role of housing on business cycle way before the recent financial crisis.…”