“The world must act to contain the risk of another devastating housing crash.”
— Zhu Min, deputy managing director at the International Monetary Fund
In the space of a few days, June 11-12, a senior International Monetary Fund official and three of the United Kingdom’s chief financial policymakers warned that a potentially devastating crash of global housing prices pose a major threat to economic stability.
Zhu Min, IMF deputy managing director, wrote in a blog post that over the past year, housing prices rose in 33 out of 52 countries in the IMF Global Housing Price Watch. The IMF has created a Web page, at http://bit.ly/imfglobal — to provide transparency on a cross-country basis and a central clearing house of data.
The IMF believes the global housing price spiral cannot be sustained because housing costs have exceeded people’s ability to pay. Soaring mortgage defaults would cause significant losses to borrowers and lenders.
According to a Wall Street Journal report, IMF data have revealed global problems: In Canada, house prices are 33 percent above their long-run average in relation to incomes. U.K. house prices are 27 percent out of line with incomes. Prices have climbed more than 10 percent from a year ago in the Philippines, 9 percent in China and 7 percent in Brazil.
Zhu pointed out a quandary for policymakers in this era in which central banks have kept interest rates low and government policies have encouraged home buying: how to lance bubbles to prevent house prices from soaring without sapping a fragile recovery.
America offers good news relative to most other nations. The IMF said the U.S. market was less expensive now than historically — 13.4 percent below their long-run average relative to incomes.
On June 12, according to the Financial Times, three senior financial policymakers of the U.K. warned that the British zeal for real estate posed a threat to their economy. Chancellor of the Exchequer George Osborne, Bank of England Governor Mark Carney and U.K. Business Secretary Vince Cable highlighted several ominous signs that could portend a housing bubble: rocketing prices, lax lending and over-leveraged consumers.
Osborne proposed new measures to allow the Bank of England to limit risky mortgage lending. He would give the Financial Policy Committee, which is part of the Bank of England, additional powers to limit the proportion of high loan-to-income mortgages each bank can make. The bank might ban all new mortgages above a certain loan-to-income ratio.
Carney indicated that the Bank of England might increase interest rates soon to forestall a bubble. Most Britons have adjustable-rate mortgages. If interest rates rise, over-leveraged borrowers will face a pinch.
Cable said in a radio interview that “three to three and a half times a person’s income is a stable level. I was appalled when I discovered that banks were lending five times.”
Cable counseled that borrowers and lenders could suffer heavy losses if overall housing prices fall. Growing delinquencies could ripple through the U.K. economy, slamming the brakes on spending and lending and derailing the U.K.’s recovery.
It appears inconceivable that global policymakers, lenders and borrowers are repeating the devastating mistakes that led to the 2008-2009 global financial crises. We need to heed Zhu’s admonition that policymakers must implement regulations to reign in soaring housing prices immediately.
He recommended the use of all of the following options:
Limits on mortgage lending relative to house values and incomes.
Higher capital requirements for banks making risky loans.
Stamp duties to tamp down foreign demand for investment properties. In 2008, America’s housing problems migrated overseas. This time, housing price implosion abroad could affect us.
Originally published in the Sarasota Herald-Tribune
