1. The sources of house price change: Identifying liquidity shocks to the housing market Michael White Paloma Taltavull de La Paz 20th ERES Conference Vienna, July, 2013 Work in progress

2. Agenda Introduction: Housing and the channels of transmission Defining the channels Analysis and Model Data Results Conclusions

3. Introduction Liquidity increase was global since late 90’s – Addressing towards growing economics – Activities in strong expansion first industry goods –exports, second real estate –construction-housing Increasing activity through financial system and capital markets – Interbanking flows did increase – Feeding economies through bank system: liquidity acceleration – Credit multiplier … finance accelerator Housing market role?

4. Introduction Analysis from fundamentals: – General economic growth lead to  employment  immigration…..  housing demand  non residencial real estate. – Whealth  promotes ownership (social policy, habits..) – Credit needs … households and small enterprises Maximun level of credits?, no credit constrains?

5. Introduction Credit use ….. Macro economic effects credit channel.. Credit multiplier … Promoting homeownership instead of rent Income and wealth effect Stronger housing markets ---- demand more mortgages ---- more transaction --- stronger HM Increasing prices?

6. Introduction Mid 2000’s ECB’s analysis dept on the fact that most liquidity went into the housing market (and real estate) Discover a strong channel between monetary indicators and house prices Multiple ways through transmit monetary impulses into house prices and reverse … House Price Channel

7. Aim of the paper Identify the channels for monetary policy to affect housing prices An the role of housing supply elasticities – 3 channels: Asset inflation channel Credit channel Transaction channel Find evidence in two countries: Spain and UK, using a regional basis

8. Preview of results

9. Fundamentals Strong macroeconomics impacts from housing boom – the house price bubble – Construction cycle. 4 effects associated to the stress of housing market: (1) the aggregate effect on the output from the strong housing construction process in some countries (supply side effect), – Barker, 2004, Glaesser, Gyourko & Saiz, 2008, DiPasquale, 1999, Meen, 2002, Saiz, 2008 (2) the wealth effect…..increase of general consumption, (3) the increase on household leverage resulting from the ownership entrance in the market, (4) the increase on systemic risk of the economies experiencing the housing boom due to the rise in mortgage concessions – (these three are effects from the demand side view). – Case, Quigley and Shiller, 2001, 2005, 2011, Goodman, 2005, Muelbauer, 2008.. Among other

10. Fundamentals Mortgage credit allows ownership demand to become effective … demand impulse It was thought that was exogenously determined through the credit channel (main) and Asset inflation channel (Mishkin (2007) and Muellbauer (2007)) Its marginal effect on house price is captured by the interest rates price elasticities. But there are also other channels influencing house prices and liquidity simultaneously (endogeneity) – Transaction Channel

11. Fundamentals Macroeconomic effect of mortgage generation is explained through the credit channel theory (Mishkin, 1995) Two different transmission way + housing collateral effect (Muelbauer, 2007)

12. Fundamentals Recent analysis identify more preciselly the transmission channels where house prices could play relevant role: Credit channel is the most analysed (Aron et al, 2010, Muelbauer, 2007, Otsuka, 2006, Mishkin, 2007, Lastrapes..) Collateral effect of housing wealth is the base of the lending channel (Weber et al, 2011, Setzer et al, 2010) Global liquidity spillover exists to asset price inflation (Belke et al, 2008, And housing amplify its effects ( Greiber and Setzer, 2007).. Housing price channel But depending on how housing supply reacts to the impulses… supply elasticity

13. Fundamentals There are three channels (Greiber and Setzer, 2007) – 1 Friedman – Money demand channel (classical) – 2 Asset inflation channel – 3 Credit channel

14. Fundamentals 1 Friedman – Money demand channel (classical) – Wealth Effect – Substitution effect – Transaction effect

15. Fundamentals 2 Asset inflation channel

16. Fundamentals 3 Credit or lending channel – And, more credit increase liquidity As causality is in two directions, the channel is identify as an accelerator (Greiber and Setzer, 2007).

17. Aim of this paper Approach the credit channel theory with some empirical evidence, testing: – Asset inflation channel – Subject to supply responses Test the causal-channel relationship With elasticities being calculated as: Apply to two countries and their regions (R): – Spain and UK

18. Data National and regional data, quarterly Pool with regions and time series (1995-2011) Secundary sources: official databases

19. data VariablesDefinitionSourcePeriod lRPHReal House prices (logs)Ministry of Fomento-Spain1995q1-2011q2 (1989q1 for Spain) HBOS1983q1-2011q1 LMIGMigration. Net increase on population (logs) INE. Sp1988q1-2010q4 Government Statistics - UK1983q1-1009q2 LRINCIncome (logs)INE. Sp1990Q1-2011Q1 Regional Statistics - UK1990q4-2009q4 RIRReal mortgage interest rateBank of Spain1990q1-2011q1 Bank of England1983q1-2011q1 INFInflationINE. Spain1992q1-2011q1 Government Statistics - UK1983q1-2011q1 LRMORTGFlow of real mortgage credits to finance housing purchases (logs) INE. Spain1990Q1-2011Q1 Council of Mortgage Lenders - UK 1983q1-2011q1 LM3Liquidity in the economy-M3 (logs)Bank of Spain1990q1-2011q1 Bank of England1983q1-2010q4

20. Regional data

21. data

23. UK prices

25. Liquidity

26. Empirical evidence Asset inflation channel – Panel techniques 2 separate pools (UK and Spain) Pooled least square – UK: 1996-2011, 12 regions, 660 obs – Spain: 1995-2011, 17 regions, 969 obs. With elasticities ‘bi’ being estimated as: D

27. Empirical evidence Elasticities. The supply model: For Spain and UK Let the elasticities to vary among regions, so, estimating b 1i Test for breaking points.. Chow test show 2008 (UK) and 2007 (spain) as structural changes with permanent effects Logs, regional (fixed) effects

28. Empirical evidence

29. Empirical evidence. Asset i. channel Where lPr is a matrix with logs of house prices by i regions L  is m3 monetary aggregate: total liquidity inf is inglation rate by country, e_sup is the elasticity of suppy by region i, constant for all period The subscript ‘i’ refers each region (UK and Spain) and m is the stochastic disturbance term Control by fundamentals DlPr it =  +  1 lM3 t-1 +  2 inf t +  3 e_supi t +  t  lPr it =  +  1 lM3 t-1 +  2 inf t +  3 e_sup i + control+  t

30. Discussion Money supply inflation results: – M3 significant in Spain and inflation in UK but not in Spain (consistent in all estimated models) The channel captures direct relationship between liquidity and house prices – Regional elasticities are significant in most regions but not in others Significant in less expensive and less volatile regions other than East of England Significant in most Spanish regions

31. Discussion Money supply inflation results: – M3 results 1% increase in M3 (-1) causes 9,2% reduction on the rate of increase of house prices in Uk and 5,8% in Spain The impacts on prices from M3 changes comes through regions captured by the significance of supply elasticities and regional characteristics (fixed effects)

32. All comments are welcome