Download BETTING THE HOUSE ` Oscar Jord`a Moritz Schularick

BETTING THE HOUSE
Òscar Jordà?
Moritz Schularick†
Alan M. Taylor §
? Federal Reserve Bank of San Francisco; University of California, Davis
† University
§ University
of Bonn; CEPR
of California, Davis; NBER; CEPR
Disclaimer:
The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the
views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.
1/26
House prices in the news
Are you worried about side effects of loose monetary policy?
2/26
Broad context
Should we worry about mortgage and house price booms?
Is there a tension between monetary and macro prudential policies?
Then and now...
ECB: Spain/Ireland versus Core
Fed: Bernanke (“Monetary Policy and the Housing Bubble”)
Norges Bank, Bank of Israel
Riksbank versus Lars Svensson
ECB decision not to buy real estate loans in TLTRO
Bank of England versus Help to Buy
Australia, Canada (?)
3/26
Focused questions
These are rare events, so we turn to large-sample historical evidence, rather
than rely on theory or small-samples...
1
2
Do low interest rates cause booms in mortgage
lending? and in house prices?
Do these booms in turn increase the odds of a
financial crash?
4/26
What we do
Two novel historical datasets: panel annual data on
disaggregated lending + house prices
The trilemma creates a natural experiment:
exchange rate peg + open capital markets →
exogenous fluctuations in monetary conditions
Local projections + IV: to measure the effect of
exogenous perturbations in monetary conditions on
mortgage lending and housing prices
Machine learning tools: use methods of binary
classification to see if mortgage lending and housing
prices affect likelihood of financial crises
5/26
What we find
Answers are yes and yes; but effects are amplified after WW2
1
2
3
Mortgage lending ↑
After WW2, mortgage lending and home ownership
rise strongly. Mortgages became dominant share of
bank lending: from 1⁄3 to 2⁄3
Interest rates → mortgages & house prices
Exogenous loose monetary conditions result in: (1)
lower interest rates; (2) more mortgage lending; and
(3) higher house prices
Mortgages & house prices → financial crises
Increased mortgage lending and house price booms
are associated with an increased likelihood of
financial crises
6/26
New annual data, N = 17, 143 years
Real estate credit: Jordà, Schularick and Taylor (2014)
House prices: Knoll (2014)
Country
Australia
Belgium
Canada
Switzerland
Germany
Denmark
Spain
Finland
France
U.K.
Italy
Japan
Netherlands
Norway
Portugal
Sweden
U.S.
Mortgage
loans
1870–2011
1885–2011
1874–2010
1870–2011
1883–2011
1875–2010
1904–2012
1927–2011
1870–2010
1880–2011
1870–2012
1893–2011
1900–2011
1870–2010
1920–2012
1871–2011
1896–2011
House
prices
1870–2012
1878–2012
1921–2012
1900–2012
1870–2012
1875–2012
1970–2012
1905–2012
1870–2012
1899–2012
1970–2012
1913–2012
1870–2012
1870–2012
——
1870–2012
1890–2012
Type of house price index
Median price; partly mix-adj.
Median price; partly mix-adj.
Avg. prices
Avg. prices; partly mix-adj.
Avg. prices; partly mix-adj.
Avg. prices; SPAR
OECD after 1970 only
Av. sq. m. price; partly mix-adj. hed.
Repeat sales; partly mix-adj. hed.
Avg. prices; partly mix-adj.
OECD after 1970 only
Avg. prices; partly mix-adj.
Repeat sales; partly SPAR
Repeat sales; hedonic
No data
Repeat sales; hedonic
Repeat sales; partly mix-adj.
7/26
House prices
Real CPI deflated
BEL
CAN
CHE
DEU
DNK
ESP
FIN
FRA
GBR
ITA
JPN
NLD
NOR
PRT
SWE
USA
-2
-4
2
0
-2
-4
2
0
-2
-4
2
0
-2
-4
1900
1950
2000
-2
0
2
1850
-4
log real house price index (1990=0)
0
2
-4
-2
0
2
AUS
1850
1900
1950
2000
1850
1900
1950
2000
8/26
Bank mortgage and non-mortgage lending
Ratio of bank lending to GDP
.2
.4
.6
.8
Relative to GDP
Nonmortgage lending
0
Mortgage lending
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
9/26
49
49
55
52
Great Depression vs. Great Recession
44
27
26
20
16
15
16
14
5
4
0
12
100
100
AUS
88
BEL
CAN
CHE
DEU
DNK
ESP
FRA
ITA
NLD
PRT
USA
FIN 1928GBR
JPN
NOR
SWE
80
73
51
51
48
85
45
70
70
51
58
41
88
56
49
49
96
84
95
86
74
71
84
56
61
48
71
93
54
64
84
19
39
1970
68
67
81
55
52
44
59
27
30
26
46
44
42
15
30
BEL
CAN
CHE
DEU
DNK
ESP
12
33
4
FIN
FRA
16
36
14
16
29
5
GBR
ITA
7
JPN
NLD
NOR
16
PRT
SWE
USA
0
AUS
61
39
29
0
12
32
52
49
20
100
100
AUS
CAN
BEL
68
DEU
CHE
ESP
DNK
FRA
ITA
NLD
PRT
USA
FIN 1970GBR
JPN
NOR
SWE
70
70
51
58
41
88
56
57
49
13
49
40
42
57
67
48
71
93
54
64
84
19
39
37
52
54
45
32
56
81
42
32
46
68
55
36
2007
51
53
87
61
59
52
49
42
32
49
30
43
30
51
44
60
58
51
43
63
33
47
29
48
FRA
ITA
12
46
68
58
44
16
7
0
AUS
CAN
DEU
CHE
ESP
DNK
FIN
GBR
NLD
JPN
PRT
NOR
USA
SWE
0
BEL
AUS
100
Realof
estate
and other
lending, percent of total bank lending
Real estate and other lending, percent
total bank
lending
Share of mortgages in total lending
39
29
51
BEL
57
CAN
49
CHE
13
87
DEU
49
DNK
40
ESP
42
FRA
ITA
NLD
PRT
USA
FIN 2007GBR
JPN
NOR
SWE
57
53
37
Real estate
60
58
52
54
45
32
56
42
32
Other
68
63
55
68
58
10/26
Lending is now mostly about mortgages
.1
Ratio of real estate lending to total lending
.3
.2
.4
.5
.6
Share of real estate in total lending (17 country average)
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
11/26
Summary of main developments
Post-WII total bank lending as a ratio to GDP
doubled relative to pre-WWII
Post-WWII tripling of real estate lending, specially
mortgages to households
Mortgage lending is about 2/3 of the loan book of
banks
12/26
A European parable
Germany versus Spain and Ireland: Interest rates, mortgages, house prices
0
5
10
15
(a) Taylor rule and actual policy interest rates (% per year)
1999q1
2000q1
2001q1
2002q1
Ireland
2003q1
2004q1
Spain
2005q1
2006q1
Germany
2007q1
2008q1
ECB policy rate
20
40
60
80
100
(b) Mortgage lending to GDP ratio (%)
1999
2000
2001
2002
2003
Ireland
2004
Spain
2005
2006
2007
2008
2007q1
2008q1
Germany
80
100
120
140
160
180
(c) House price to income ratio (1999q1=100)
1999q1
2000q1
2001q1
2002q1
Ireland
2003q1
2004q1
Spain
2005q1
2006q1
Germany
13/26
Methods: Local Projections + IV
Usual LP:
y = response vbl., r = impulse vbl. (s.t. interest rate)
∆h yit−1 = αhi + βh ∆rit + ∆Wit Γh + ∆Xit−1 Φh + uit+h
Selection on observables:
∆Wit : all contemporaneous variables except y and r
∆Xit−1 : lags of all variables, including y and r
Selection on unobservables:
Now use IV for ∆rit using zit instrument
But what instrument?...
14/26
The trilemma provides the instrument
Trilemma provides a natural experiment to identify exogenous
perturbations to home short-term interest rate
∆rit = a + b[PEGit × KOPENit × ∆rit∗ ] + uit
Data sources: Obstfeld/Shambaugh/Taylor, Ilzetzki/Reinhart/Rogoff, Quinn, JST
Base country
UK
(gold standard/BW base)
UK/US/France composite
(gold standard base)
USA
(BW/Post-BW base)
Germany
(EMS/ERM/
Eurozone base)
Pre-WW1
All
countries
Interwar
Bretton Woods
Sterling bloc:
AUS, CAN
Post-BW
All other
countries
Dollar bloc:
AUS, CAN,
CHE
JPN, NOR
All
countries
All other
countries
15/26
Base and home short-rates are correlated
Bivariate scatters
∆rit = a + b[PEGit × KOPENit × ∆rit∗ ] + uit
Obstfeld/Shambaugh/Taylor simulations: b < 1 unless peg is ultra-hard (no band)
(b) Post-WW2
Change in local short-term interest rate
-5
0
5
-10
-4
Change in local short-term interest rate
-2
0
2
4
10
(a) Pre-WW2
-2
-1
0
1
2
Change in base short-term interest rate * PEG * KOPEN
-4
-2
0
2
4
Change in base short-term interest rate * PEG * KOPEN
16/26
The instrument is relevant
Add vector of macro controls X
∆rit = a + b[PEGit × KOPENit × ∆rit∗ ] + ΘXit + uit
Dependent variable: short-term interest rate
(1)
All
Years
No Controls
(2)
(3)
PrePostWW2
WW2
(4)
All
Years
Controls
(5)
PreWW2
(6)
PostWW2
b̂
0.68∗∗∗
(0.06)
0.36∗∗∗
(0.11)
0.81∗∗∗
(0.06)
0.43∗∗∗
(0.04)
0.29∗∗∗
(0.06)
0.46∗∗∗
(0.06)
F-statistic
Observations
150.17
1875
11.59
876
169.51
999
37.16
1220
9.26
375
29.84
845
Notes: ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01. Country-based cluster-robust standard errors in parentheses. The
dependent variable is the short-term interest rate regressed on the instrument, fixed effects and when appropriate,
controls. The set of controls includes: (i) the change in short-term interest rate; (ii) the change in long-term interest
rate; (iii) the change in mortgages to GDP ratio; (iv) the change in real house prices as a ratio to per capita income;
(v) real per capita GDP growth; (vi) the change in the investment to GDP ratio; (vii) the change in the ratio of
non-mortgage loans to GDP ratio; (viii) CPI inflation; and (ix) the current account to GDP ratio. We include
contemporaneous terms and two lags. The full sample starts in 1870 and ends in 2010. The pre-WW2 sample ends
in 1938. The post-WW2 sample begins in 1946. World Wars omitted from all samples. See text.
17/26
LP-IV estimated responses
Baseline results: full control set, sample is all years
Responses
∆h Short-term interest rate
Kleibergen-Paap
∆h Long-term interest rate
Kleibergen-Paap
∆h Mortgage Loans/GDP
Kleibergen-Paap
∆h log (House Price/Income)
Kleibergen-Paap
Year
h =0
1.00
Year
h =1
1.31∗∗∗
(0.16)
Year
h =2
1.02∗∗∗
(0.19)
Year
h =3
0.80∗∗∗
(0.19)
Year
h =4
0.39∗∗∗
(0.14)
0.42∗∗∗
(0.05)
26.64
0.55∗∗∗
(0.09)
26.59
0.67∗∗∗
(0.13)
26.43
0.60∗∗∗
(0.15)
27.10
0.39∗∗∗
(0.13)
35.58
-0.45∗∗∗
(0.15)
35.24
-1.19∗∗∗
(0.38)
35.29
-1.87∗∗∗
(0.61)
34.66
-2.35∗∗∗
(0.76)
35.21
-2.82∗∗∗
(0.86)
28.44
-0.18
(0.79)
28.08
-1.76
(1.67)
27.90
-3.72∗
(2.05)
27.97
-5.02∗∗
(2.27)
28.49
-4.37∗∗
(1.88)
27.65
27.23
27.01
27.01
27.53
Notes: ∆h denotes change from year t − 1 to t + h. ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01. Country-based
cluster-robust standard errors in parentheses. Coefficient estimates of fixed effects and controls not reported. The
set of controls includes: (i) the change in short-term interest rate; (ii) the change in long-term interest rate; (iii) the
change in mortgages to GDP ratio; (iv) the change in real house prices as a ratio to per capita income; (v) real per
capita GDP growth; (vi) the change in the investment to GDP ratio; (vii) the change in the ratio of non-mortgage
loans to GDP ratio; (viii) CPI inflation; and (ix) the current account to GDP ratio. We include contemporaneous
terms and two lags. The full sample starts in 1870 and ends in 2010. Kleibergen and Paap (2006) statistic for weak
instruments reported. World Wars omitted. See text.
18/26
LP-IV estimated responses
“Boom experiment”: exogenous perturbation in short-term rate of −100 bps
-2
-1.5
Percentage points
-1
-.5
Percentage points
-1.5
-1
-.5
0
(b) Long-term interest rate
0
(a) Short-term interest rate
0
1
2
Year
3
4
0
1
2
Year
3
4
(d) log (House price/income ratio)
0
-5
1
0
5
100 x change in log
Percentage points
2
3
4
5
10
(c) Mortgage loans/GDP ratio
0
1
2
Year
3
4
0
1
2
Year
3
4
19/26
LP-IV estimated responses
Robustness check 1: OLS versus IV (attenuation bias)
Responses
∆h Short-term
interest rate
∆h Long-term
interest rate
∆h Mortgage
loans/GDP
OLS
Year
h =0
1.00
Year
h =1
0.69∗∗∗
(0.06)
Year
h =2
0.45∗∗∗
(0.04)
Year
h =3
0.38∗∗∗
(0.05)
Year
h =4
0.35∗∗∗
(0.07)
IV
1.00
1.02∗∗∗
(0.19)
0.32∗∗∗
(0.04)
0.80∗∗∗
(0.19)
0.26∗∗∗
(0.03)
0.39∗∗∗
(0.14)
0.26∗∗∗
(0.03)
OLS
0.34∗∗∗
(0.03)
1.31∗∗∗
(0.16)
0.33∗∗∗
(0.04)
IV
0.42∗∗∗
(0.05)
-0.11∗∗∗
(0.04)
0.55∗∗∗
(0.09)
-0.15∗∗
(0.06)
0.67∗∗∗
(0.13)
-0.25∗∗∗
(0.08)
0.60∗∗∗
(0.15)
-0.29∗∗
(0.11)
0.39∗∗∗
(0.13)
-0.45∗∗∗
(0.15)
-0.45∗∗∗
(0.15)
0.35
(0.33)
-1.19∗∗∗
(0.38)
0.15
(0.40)
-1.87∗∗∗
(0.61)
-0.33
(0.48)
-2.35∗∗∗
(0.76)
-0.67
(0.51)
-2.82∗∗∗
(0.86)
-0.90
(0.56)
-0.18
(0.79)
-1.76
(1.67)
-3.72∗
(2.05)
-5.02∗∗
(2.27)
-4.37∗∗
(1.88)
OLS
IV
∆h log House
prices/income
OLS
IV
20/26
LP-IV estimated responses
Robustness Check 2: Excluding controls (attenuation also)
Responses
∆h Short-term interest rate
Kleibergen-Paap
∆h Long-term interest rate
Kleibergen-Paap
∆h Mortgage loans/GDP
Kleibergen-Paap
∆h log House prices/income
Kleibergen-Paap
Year
h =0
1.00
Year
h =1
1.34∗∗∗
(0.08)
Year
h =2
1.08∗∗∗
(0.09)
Year
h =3
0.91∗∗∗
(0.11)
Year
h =4
0.76∗∗∗
(0.13)
0.40∗∗∗
(0.05)
65.14
0.55∗∗∗
(0.07)
65.01
0.64∗∗∗
(0.10)
64.50
0.61∗∗∗
(0.12)
64.43
0.49∗∗∗
(0.11)
70.42
-0.20∗∗∗
(0.07)
70.00
-0.54∗∗∗
(0.18)
69.45
-0.85∗∗∗
(0.31)
69.74
-1.11∗∗∗
(0.39)
69.67
-1.41∗∗∗
(0.49)
64.50
-0.06
(0.52)
64.44
-0.81
(1.02)
64.09
-2.00
(1.26)
64.06
-2.87∗∗
(1.40)
63.64
-2.96∗∗
(1.22)
72.01
71.98
71.98
72.03
71.69
21/26
LP-IV estimated responses
Robustness check 3: Subsample sensitivity, including control set, year-4
Responses
in year 4
∆4 Short-term
interest rate
All
Years
0.39∗∗∗
(0.14)
PreWW2
0.36∗∗
(0.18)
PostWW2
0.31∗
(0.18)
Set z = 0
1946–72
0.36∗∗
(0.16)
Exclude
1946–72
0.39∗∗
(0.16)
Exclude
1914–72
0.30
(0.23)
Kleibergen-Paap
∆4 Long-term
interest rate
27.10
0.39∗∗∗
(0.13)
9.67
0.40∗∗∗
(0.15)
26.59
0.24
(0.15)
27.84
0.40∗∗∗
(0.14)
25.07
0.41∗∗∗
(0.14)
21.16
0.36∗
(0.18)
Kleibergen-Paap
∆4 Mortgage
loans/GDP
35.21
-2.82∗∗∗
(0.86)
8.89
-1.94
(1.32)
33.23
-2.67∗∗∗
(0.91)
34.07
-2.95∗∗∗
(0.95)
32.21
-3.10∗∗∗
(0.93)
25.27
-3.47∗∗∗
(1.06)
Kleibergen-Paap
∆4 log House
prices/income
28.49
-4.37∗∗
(1.88)
9.49
-1.34
(4.82)
28.29
-5.37∗∗
(2.12)
29.48
-4.66∗∗
(2.14)
26.52
-4.38∗∗
(2.04)
22.84
-5.88∗∗∗
(2.25)
Kleibergen-Paap
27.53
7.99
24.99
27.92
25.25
20.01
22/26
Financial crisis prediction
Binary classification based on mortgage lending and house prices
(a) Logit models, country fixed effects
Mortgage loans/GDP,
lagged 5-year change
(1)
All years
0.17∗∗
(0.08)
(2)
Pre-WW2
0.11
(0.14)
(3)
Post-WW2
0.26∗∗
(0.10)
log (House prices/income),
lagged 5-year change
0.07∗∗
(0.03)
0.08
(0.05)
0.07
(0.05)
1275
415
860
0.66
(0.04)
0.63
(0.06)
0.71
(0.06)
0.53
(0.03)
0.53
(0.03)
0.54
(0.06)
0.02
0.17
0.02
Observations
(b) Correct classification frontier statistics
Model AUC
Benchmark AUC, country fixed effects only
H0 : AUC model = AUC benchmark (p-value)
23/26
Financial crisis prediction
0.00
True positive rate
0.25
0.50
0.75
1.00
Binary classification based on mortgage lending and house prices
0.00
0.25
0.50
True negative rate
Benchmark AUC = 0.53 (0.03)
Reference
0.75
1.00
Model AUC = 0.66 (0.04)
24/26
Conclusions
Patterns that emerge strongly after WW2...
1
2
3
Changing role of banking:
Mortgage lending share from 1⁄3 to 2⁄3
Fluctuations over the business cycle:
short rates → mortgages + house prices
Predicting financial crises:
mortgages + house prices → financial crises
25/26
Background papers available in working
paper form
Betting the House. Just discussed.
The Great Mortgaging: Discussion of new historical
dataset of credit broken down by mortgages and
non-mortgages. Long-run trends and business cycle
fluctuations. Financial crises and type of credit
buildups.
26/26