1. Habitation International Session 2 Housing Finance & Financial Stability: On-Going Questions on the Role of Government André Asselin Habitation International May 28, 2015 International Conference on: Affordable Housing & Mortgage Financing May 28-29, 2015 Organized by: Infrastructure, Housing & SME Finance Department State Bank of Pakistan, Karachi

2. Habitation InternationalOutline Housing stability amidst economic recovery measures o Expansionary Monetary Policies and Housing Bubbles o Indicators of Potential Housing Instability Need for New Indicators ? and role of Government 2

3. Habitation International Housing stability amidst economic recovery measures 3

4. Habitation International Expansionary Monetary Policies and Housing Bubbles - 1 “Governments throughout the world contributed in a variety of ways to the expansion of leverage.” * “By holding interest rates at abnormally low levels during the extended period between 2000 and 2008, central banks encouraged the massive glut in worldwide liquidity and the corresponding asset price inflation that characterized those years * From : Group of 30 “The 2008 Financial Crisis and Its Aftermath: Addressing the Next Debt Challenge” Occasional Paper 82, by Thomas A. Russo Aaron J. Katzel, 2011 Gourinchas, Pierre-Olivier. 2010. “U.S. Monetary Policy, ‘Imbalances’ and the Financial Crisis.” Remarks prepared for the Financial Crisis Inquiry Forum

5. Habitation International Expansionary Monetary Policies and Housing Bubbles - 2

6. Habitation International Expansionary Monetary Policies and Housing Bubbles - 3

7. Habitation International Need for New Indicators ? and role of Government 7

8. Habitation International House Price to Income Ratio Still Meaningful?

9. Habitation International Closer Look at the House Price to Income Ratio Source: “Era of Benign Neglect of House Price Booms is Over” | iMFdirect - The IMF Blog Perhaps house price increased faster than income as a result of lower interest rates ? Perhaps housing prices first needed to recover ?

10. Habitation International House Price to Rent Ratio Still Meaningful?

11. Habitation International Closer look at the House Price to Rent Ratio Source: “Era of Benign Neglect of House Price Booms is Over” | iMFdirect - The IMF Blog Perhaps rents did not increase as a result of lower interest rates whereas ownership housing prices did? Perhaps housing prices had more room to recover than rents?

12. Habitation International Housing Instability a Potential By-Product of Monetary Policy Governor of Bank of Canada: “..the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession.” * Governor of Bank of Canada: “This is one of the byproducts of what we’ve been through. It’s not something that happened simply by itself,” … “It would be very unusual to have that and not have a degree of overvaluation.” * Bank of Canada's Poloz dispels speculation of housing bubble, The Globe and Mail, Apr. 28 2015 Traditional measures of “Housing Price to Income” and “Rent Price to Income” moving in the expected direction but tell us that we need to be prudent going forward and build resilience to shocks

13. Habitation International Measures to build Resilience to Shocks MIPs, MAPs and MOPS (Avinash Dixit – Princeton U.) o MIP – Micro-prudential rules Capitalization Capitalization of systemically important financial institution Basel 3 o MAP - Macro-prudential rules Maximum LTV Maximum Debt Service Ratio Reduced amortization periods Financial product rules MOP – Monetary Policies o Blunt instrument o however…”in many relevant cases at the moment, policy interest rates have to remain low to support economic recovery”(Min Zhu, Deputy Managing Director, IMF, June 5, 2014)

14. Habitation International Macro-Prudential Tools

15. Habitation International Challenges in the Midst of MIPs, MAPs Housing Finance access to younger households o MAP measures to limit Debt Service, LTV and amortization can have disproportionate impact on new purchasers Foreign Investors seeking rising housing prices o Propensity to buy housing with no or less housing finance thus not much affected by MIPs, MUPs or MOPs High housing prices not necessarily the same throughout countries – localized problems a problem for blunt macro-policies, best handled through solid credit underwriting

16. Habitation InternationalConclusion High housing prices largely the result of monetary policies and low interest rates Traditional indicators must be read differently – not as evidence of overvaluation – but as evidence of need to prepare for potential shocks Evidence that national and international regulators are working towards “soft landing” scenarios through MIPs and MAPs 16

17. Habitation International THANK YOU André Asselin Habitation International aasselin@me.com 17