Who’s afraid of depressing asset prices by raising overnight rates?
Alan Greenspan has repeatedly said that raising overnight rates wouldn’t have been effective in mitigating the housing bubble. But it turns out that at least one member of the FOMC worried in a 2003 meeting that that was exactly what would happen should the Fed raise rates too quickly. Read more
The year was 2002. The US was on shaky economic footing, still reeling from stock market declines and the as-yet uncertain prospect of a two-pronged conflict in the Middle East. And Alan Greenspan, then Fed chairman, was worried about consumer spending.
Alan Greenspan addressed the FOMC. According to his recently-released draft paper, published by the Brookings Institution, he was aware that “almost all market participants” were aware of the growing risks in the mortgage market:
I expressed my concerns before the Federal Open Market Committee that ‘. . . our extraordinary housing boom . . . financed by very large increases in mortgage debt – cannot continue indefinitely.’ It lasted until 2006.
The transcript from the meeting shows Mr Greenspan was even more downbeat than his recent recounting. Read more
Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.
The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011. Read more
Unless you’re in Ireland.
An economic letter put out by the Federal Reserve Bank of San Francisco today put the US housing run-up in perspective. In a cross-country comparison they found that home prices in the US rose less than those in a whole swath of European countries.
It’s worth noting that the graph seems to be consistent with data from the Federal Housing Finance Agency (formerly Ofheo), rather than the more commonly used Case-Shiller 20-city index, which would have shown US home prices more in line with Spanish ones. Each index has its advantages. The FHFA’s tracks the same home over time across the US, but only looks at homes worth below a certain amount, likely skewing the increases downward. The Case-Shiller index includes the higher value homes, but only includes 20 of the US’s cities, likely skewing upward). Read more
The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.
Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.
We have too many houses, so I wouldn’t expect that to really boom on us.
Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more
The US government may be fueling another housing market bubble, according to a report released last week by the the Special Inspector General of the Troubled Asset Relief Programme (SigTarp).
To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the Federal Government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
And yesterday, Paul Volcker, the former Fed chief who is now proposing a ban on proprietary trading at deposit-holding banks, reiterated the risks of too much government backing for the mortgage market, Read more
The Norwegian central bank is risking an asset bubble by keeping interest rates close to the US benchmark in order to contain krone gains and protect exporters.
So says Nouriel Roubini, NYU professor, and, more important these days, one of the few who correctly predicted the financial crisis. “Even in Norway there is no willingness to raise rates – despite inflation and robust growth – because of concerns about the currency. That means you are feeding real estate and other bubbles,” Mr Roubini told Bloomberg in Oslo today. Read more
The governor of Israel’s central bank has denied the country is experiencing a property bubble. “We have a problem of real estate market and people call it a bubble. But this is not a bubble,” Professor Stanley Fischer said at the tenth annual Herziliya conference.
Bubble denials are always tantalising, as only time can confirm or deny them, with ample room for speculation in between. House prices rose 5.6 per cent in 2009, contributing to an inflation rate of 3.9 per cent last year. This does not settle the bubble question, of course. We need to know about supply and demand. Read more
A Bank of Canada official earlier today sought to dampen concerns that the Canadian housing market be caught in the same type of bubble that threw the US into recession.
In the Bank of Canada’s view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors – notably the historically low borrowing costs, as well as pent-up and pulled-forward demand – which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm.
One measure of the “underlying supply/demand fundamentals” of housing is the amount home prices rise relative to rental prices. In normal times they rise at roughly the same rate. In the US, house prices rose over 100 per cent between 2000 and the peak of the housing market in 2007, according to the 20-city Case Shiller index, while rental prices grew just 24 per cent. By contrast, in Canada rental prices rose 11 per cent from 2000 to 2008, while the price of a houses in the Teranet 6-city composite index rose 85 per cent over the same time. Read more
Very hawkish speech from Tom Hoenig today. He worries that staying too low for too long will generate financial stability risks and misallocation of resources as well as inflation risks.
In doing so he more or less explicitly rejects Bernanke’s weekend claim that keeping rates low after the dotcom bust had little or nothing to do with the housing and credit bubbles. Read more
Federal Reserve governor Elizabeth A. Duke today spoke to the Mortgage Foreclosure Policy Conference about the conditions that led to the housing crisis and her vision of the future of housing finance.
“A speculative mentality took hold among investors and consumers who expected limitless house price appreciation,” she said. Read more
In a characteristically combative speech today, Adam Posen, an external member of the Bank of England’s Monetary Policy Committee, insists interest rates are a blunt tool for combating asset price bubbles. He suggests property taxes instead, writes Chris Giles of the Financial Times, but fails to analyse whether these would work any better than interest rates Read more