Index

risk.3 It seems therefore that this macroprudential tool would not have helped to mitigate the housing and mortgage debt bubble.

The value of a house does not need to coincide with its price. The price of the house is the transaction price. However, the value of the house is certifed by an independent appraisal company before the mortgage is signed. The bank chooses this private company. An important difference between the two is that the value of the house is the expected market price in the near future. In general, the two variables should be very similar. However, notice that the value of the house can depend on future price expectations. Basco and Lopez-Rodriguez (2018) analyze the behavior of the value-to-price ratio during the boom-bust of house prices. The right-hand side of Fig. 6.3 reports the monthly evolution of the value-to-price ratio in municipalities with low (red) and high (blue) education. We want to remark three facts from this fgure. First, the value-to-price ratio was above one during the whole boom-bust period. Second, the value-to-price ratio was higher in low educated municipalities. Third, the difference in the ratio between low and high-educated municipalities was exacerbated during the boom and it declined after the collapse of the housing bubble. The three facts are consistent with the view that in low-educated municipalities there were high house price expectations, which enabled banks to grant larger loans to borrowers and contributed to infate the housing bubble. Once the housing bubble burst, this difference in future house price expectations disappeared and the value-to-price ratio converged. Banking regulation seemed to favor this feedback between overvaluation, loans and the housing bubble. With an overvalued house, the bank could lend a higher loan without being penalized for having an LTV too large (.80). Moreover, by having a mortgage with an LTV below .80, the bank could securitize the loan. By securitizing these mortgages, the banks obtained liquidity to fund additional mortgages. These additional mortgages were used to infate house prices and house price expectations were fulflled. Note that this feedback loop breaks when the international securitization market freezes. According to this view, a better macroprudential tool would be

3 Basco and Lopez-Rodriguez (2018) also discuss the distribution of these LTV ratios. That is, one could be concerned for the average if the distribution were skewed to the left, so, that the average underrepresents the median value of LTV. They document that this is not the case. Indeed, only around 20% of new mortgage loans exceeded the .80 threshold.

to reduce this feedback mechanism between future house price expectations and loans.

Finally, in the model discussed in Chapter 3, we emphasized the role of fnancial globalization. In the model, a fnancially developed country in autarky would be immune to rational bubbles. In contrast, if the country opens up to trade with a fnancially underdeveloped economy, rational bubbles can emerge. Therefore, fnancial globalization is conducive to rational bubbles. Note that this does not imply that a fnancially developed economy cannot have behavioral bubbles in autarky. Behavioral bubbles can always arise because they are driven by differences in beliefs. However, it could be argued that behavioral bubbles are also more likely to emerge with globalization. One reason is that fnancial globalization implies that more investors can participate in asset markets. The dispersion of beliefs is likely to rise with the number of participants. Therefore, it can be that fnancial globalization, by increasing the number of market participants, is conducive to behavioral bubbles too. Another reason why fnancial globalization may be related to behavioral bubbles is through its effect on the interest rate. As we saw in the model discussed in Chapter 3, fnancial globalization puts downward pressure on the interest rate. It may be argued that, faced with a low safe return, some investors may enter into riskier asset markets. Again, as more investors participate in an asset market, the more likely it is that disagreement on the price of the asset occurs and, thus, an asset price bubble arises. Finally, fnancial globalization affects also the size of the bubble. This applies to all types of asset price bubbles. The larger the amount of money that investors are willing to invest, the larger will be its effect on the price of the asset. This channel is intuitive. For example, we documented that the current account defcit (over GDP) increased 5% in Spain between 2000 and 2007. This extra money helped to fund the housing bubble. If the increase in defcit would have been just .5%, the rise on house prices would have been much lower. Thus, we can conclude that keeping fnancial globalization in check may be a good macroprudential tool. From this argument, we do not mean to imply that fnancial globalization is bad by defnition. On the contrary, the fact that individual investors may invest in different countries reduces the risk faced by these individuals (i.e., they do not need to put all eggs in the same basket). Similarly, frms do not depend on the liquidity of their country to fund their investment projects. More generally, the free movement of capital should, theoretically, achieve the most effcient

allocation of resources. That is, capital would go where it is more needed. Our argument is that fnancial globalization may have negative side effects.

To have a sense of how recent fnancial crises have changed the policy consensus on the role of international macroeconomics, it is illustrative to consider the steps taken in the European Union. Before the fnancial crisis, the only variables taken into account for the macroeconomic stability of European countries (the Maastricht Criteria) were infation and government fnances (debt and defcit). This consensus changed after the fnancial crisis. Indeed, the European Union introduced in 2011 a “Macroeconomic Imbalance Procedure”. Under this procedure, 14 indicators are selected to capture the internal and external imbalances of the countries.4 It is remarkable that the frst indicator is the current account (over GDP). It is considered an imbalance when the 3-year backward moving average is either too high (+6%) or too low (−4%). Other indicators include net international investment position, private debt, fnancial sector liabilities and house prices. This new set of indicators is more comprehensive and provides a better picture of the vulnerabilities of the countries than the narrow set of variables considered in the Maastricht Criteria. It is therefore a good starting point to detect the emergence of future problems. However, it is not clear how, after the monitoring of these vulnerabilities, the European Commission will be able to force the countries to revert these bad indicators. Formally, if a country is found to have an excessive imbalance, the Commission requires that the country proposes a plan to correct the balance or it will impose penalties to the country. In the best-case scenario that the country proposes a reasonable plan, the plan may fail to address the source of the problem or even create new imbalances.

To conclude, we have seen that the recent fnancial crisis has spurred a debate on the origin of fnancial crisis and credit bubbles. Even though the evidence in the United States is mixed, it seems clear that the credit supply played an important role in the buildup of the recent mortgage debt bubble. In this sense, some macroprudential tools have been

4 The interest reader may fnd more exhaustive information on the Macroeconomic Imbalance Procedure in the following website and links within. https://ec.europa.eu/ info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/macroeconomic-imbalance-procedure/ scoreboard_en.

proposed to mitigate the emergence of housing bubbles (or mortgage debt bubble) like limits to LTV ratio. This macroprudential tool may have a merit and work in some countries, but as the Spanish bubble illustrates, it is not a universal solution. One lesson that policymakers have learnt from the crisis is the need to consider the external imbalances of the countries, because they are an important source of vulnerability. On this front, it is still unclear how international organizations will be able to coordinate and correct these global imbalances. Moreover, as we have seen, asset price bubbles are recurrent throughout history and it would be a big surprise if we had witnessed the last housing bubble. In this sense, policymakers should have learnt from the past and be ready for when the next housing bubble emerges.

references

Adelino, M., Schoar, A., & Severino, F. (2016). Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class. Review of Financial

Studies, 29(7), 1635–1670. Basco, S., & Lopez-Rodriguez, D. (2018). Credit Supply, Education and

Mortgage Debt: The BNP Securitization Shock in Spain. Madrid: Mimeo,

Banco de España. IMF. (2013). Key Aspects of Macroprudential Policy (IMF Working Paper). Jordà, Ò., Schularick, M., & Taylor, A. M. (2013). When Credit Bites Back.

Journal of Money, Credit and Banking, 45, 3–28. Mian, A., & Suf, A. (2009). The Consequences of Mortgage Credit Expansion:

Evidence from the U.S. Mortgage Default Crisis. Quarterly Journal of

Economics, 124(4), 1449–1496.

index

A

Aliber, R., 2, 7–10 asset price bubbles, 1–3, 6, 9, 17, 18, 23, 40, 65, 76, 85

B

behavioral, 2, 17, 18, 20–23, 47, 57, 70, 93 BNP Paribas, 87 borrow/borrowing, 3, 9, 20, 29–31, 39, 40, 47–49, 56, 65–74, 81, 82, 86, 87

C

Chaney, T., 61, 70, 81 collateral, 3, 67, 69–71, 73, 81, 82 consumption, 3, 23, 24, 28, 30, 38, 47–49, 65, 68, 74, 86 credit, 3, 24, 48, 68, 70, 71, 75, 81, 85–88 current account, 3, 37–40, 42–46, 52, 57–59, 61, 62

D

distortion, 3, 66, 67, 70, 71, 77, 82 Dot-Com Bubble, 2, 5, 7, 9, 19, 57–59, 61, 74

E

education, 89, 90, 92 expectations, 19–21, 87

F

fnancial crisis, 1, 4, 59, 74–76, 85, 94 fnancial globalization, 3, 37, 48, 55, 58–61, 93 fnancially developed country, 3, 49, 50, 55, 57 fnancially underdeveloped, 3, 17, 31, 48–58 fundamental value, 2, 6, 7, 19, 20, 23, 25, 82

© The Editor(s) (if applicable) and The Author(s) 2018 S. Basco, Housing Bubbles, https://doi.org/10.1007/978-3-030-00587-0 97

G

globalization, 3, 4, 29, 37, 38, 45–48, 51, 54–62, 93, 94

H

housing bubble(s), 1–5, 11, 12, 14, 17, 22, 23, 29, 37–39, 42, 44–47, 49, 51, 57–61, 65–68, 70–79, 81, 82, 85, 86, 90, 95 housing supply elasticity, 33, 34, 59–62, 66, 67, 73, 74, 76–79, 82, 90

J

Jordà, O., 11, 74, 75, 85

K

Kindleberger, C.P., 2, 7–10

L

LTV, 90–92, 95

M

Mackay, C., 7, 18 macroprudential, 4, 85, 90, 92–94 Mian, A., 61, 67, 68, 74, 86, 88–90 misallocation, 71–73, 78, 79, 81, 82 mortgage, 67, 86–88

P

productivity, 3, 10, 27, 28, 65, 72, 79, 82

R

rational bubbles, 3, 23, 26, 29, 30, 33, 49, 50, 53–55 real estate assets, 3, 69–72, 77, 78, 81, 82

S

Saiz, A., 60–62, 67, 73, 76, 77 Samuelson, P.A., 17, 23, 33, 50 Schularick, M., 11, 74, 75, 85 securitization, 87, 92 Shiller, R.J., 10, 17–19 shortage of assets, 2, 17, 23, 28, 29, 50, 51, 53, 54, 76 South Sea Bubble, 5, 7, 8 Spain, 3, 8, 12, 13, 19, 42–44, 73, 76, 79, 81, 82, 88, 90 Sraer, D., 61, 70, 81 storage technology, 20, 21, 24–28 Suf, A., 61, 67, 68, 74, 86, 88

T

Taylor, A.M., 11, 74, 75, 85 Temin, P., 8, 9 Thesmar, D., 61, 70, 81 Tirole, J., 17, 26, 29, 31, 33 Tulipmania, 1, 2, 5, 7, 8, 18, 19

U

United States (US), 3, 5, 7, 11, 12, 29, 37, 42–44, 52, 53, 57–62, 66–70, 73, 74, 76, 77, 81, 86, 87

V

Voth, H.-J., 8, 9