Abstract
We use duration analysis to assess the impact of securitization, mortgage sector liberalization and government involvement in housing finance on the length of housing booms, busts and normal times in a panel of 20 OECD countries over the period 1970Q1-2015Q4. Our results reveal that a move towards a more liberalized mortgage sector is associated with longer housing booms, while an increase in securitization is linked with shorter housing busts. They also show that the length of housing booms and busts is particularly sensitive to housing finance characteristics, but that does not seem to be the case for normal times. Additionally, government support measures do not necessarily cushion against housing busts. A careful assessment of their distributional impact, as well as their effect on the trade-off between liquidity and guarantee/loan provision, is also required to prevent (longer) housing booms. All in all, housing finance regulation may prove especially relevant to shield against the damaging effects of housing busts and the financial stability risks associated with housing booms. Monetary policy can also be an important complement to macro-prudential policies. Finally, government participation in housing finance should be designed in a way that avoids an undesirable amplification of house price fluctuations.
Highlights
The burst of the technological bubble in the early 2000s propelled interest rates to historically low levels, setting the pace to housing price booms in a large number of developed countries
In what concerns the development of the mortgage market, we find evidence, albeit weakly, that a move towards a more liberalized mortgage market is linked with longer housing booms: the coefficient associated with the variable MBSindex in the continuous-time (Weibull) duration model is negative (-1.156) and significant at the 5% level
The sign “+” indicates that p is significantly higher than 1 using a 5% onesided test with robust standard errors; d, c and i, indicate the presence of decreasing, constant or increasing positive duration dependence at a 5% level, respectively
Summary
The burst of the technological bubble in the early 2000s propelled interest rates to historically low levels, setting the pace to housing price booms in a large number of developed countries. The severity and persistence of the Great Recession - and its roots on the sub-prime mortgage segment of the housing sector lending - highlighted four major aspects: 1) the importance of assessing the intricate effects of securitization and mortgage market development and transformation on the duration of housing booms and busts;1 2) the relevance of integrating the impact of housing finance characteristics and institutional mortgage market differences on the likelihood of housing booms (busts) ending in a way that is informative for the design of a preventive macro-prudential toolkit; 3) the pertinence of a thorough calibration of government participation in housing finance to avoid the potential exacerbation of housing price swings; and 4) the general need to better understand the characteristics of the different phases of the housing cycle and the specific factors underpinning them (Loungani 2010a, b; Igan et al 2011, 2012) These are the key goals of our paper.
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