Housing boom portends danger for emerging market – IMF

The International Monetary Fund (IMF) has warned that house prices boom portends grave signal for emerging market, especially after a recession.
According to the global financial institution, the housing price boom is trouble.
The IMF report noted that whenever price surges it most times is likely to end in busts, and the recovery from those busts is slower and more costly in terms of lost income.
The report which looks at the global prices of houses and credit availability in many emerging market shows that there has been a more rapid growth in credit availability; statistically, credit growth can account for nearly half of the variation in house price increases across countries.
“Policymakers are of course aware of these developments and are taking active steps to manage housing booms. This reflects a change in attitudes from the past, where the dominant view was that because it is difficult to identify and prick housing bubbles as they are developing,”
The Bretton Woods Institute, however, insisted that monetary policy and microprudential policies holds the key to managing the crisis.
“But policymakers now realize that they may not have a big enough mop to clean up after the fact. Hence, many countries are trying both to limit the extent of the boom and the likely damage caused by a bust, even though the task remains arduous.
They include both broad-based tools—such as countercyclical capital buffers that protect the financial system from overall credit booms as well as sectoral tools targeted at the housing market.
These will include limits on the loan-to-value (LTV) ratio, which cap the size of the mortgage loan relative to the value of the property associated with the loan; limits on the debt-service to income (DSTI) ratio, which restrict the size of a debt service payment to a fixed share of household income; sectoral capital requirements, which force lenders to hold extra capital against loans to a specific sector, such as real estate and building reserves against an eventual nonpayment of loans to particular sectors.
The IMF’s Global Housing Watch tracks developments in housing markets across the world on a quarterly basis. It provides current data on house prices as well as metrics used to assess valuation in housing markets, such as house price to rent and house-price to income ratios.
Mortgage approvals in UK at lowest level for 13 months
The approval of few mortgages by British banks will have a down side effect on houses purchases in the housing sector, analysts have predicted.
Mortgage approvals fell to a 13-month low of 40,488 in October, down from 41,576 in September, according to the industry trade body UK Finance.
Chief UK Economist at Consultancy Pantheon Macroeconomics, Samuel Tombs, said the Bank of England’s decision earlier this month to raise interest rates for the first time in more than a decade, to 0.5 per cent from 0.25 per cent, would probably exacerbate the downward trend.
Tombs said: “This appears to be just the start of a bigger downturn,” “Housing market activity likely has cooled further in recent weeks, given that mortgage rates have moved swiftly higher and consumer confidence has weakened since the hike by the Bank of England’s monetary policy committee.”
The chancellor’s decision to cut stamp duty for first-time buyers would do little to counter this downturn, primarily because it is expected to push up house prices, Tombs said.
For chief economic adviser to the forecasting group EY Item Club Howard Archer, the mortgage approval figures were the latest evidence of “lacklustre housing market activity”, after new buyer enquiries fell in October at their fastest pace since July 2016.
He noted that cash-strapped consumers were reluctant to commit to major purchases at a time when real pay was falling, as shop prices rise faster than wages.
“It is also very possible that the recent Bank of England interest rate hike will weigh down on housing market activity, While the increase in interest rates was just 0.25 per cent and mortgage rates are still at historically very low levels, it could have a significant effect on housing market psychology.”
EY Item Club is forecasting house price growth of about 2-3% in 2018, underpinned by a shortage of homes for sale, high employment, and mortgage interest rates that remain historically low.
It was a different story for existing homeowners, who rushed to remortgage in October, before the bank’s highly anticipated rate rise in November.
There were 34,036 loans approved for remortgaging last month, according to UK Finance. That was up by 11.6 per cent compared with September, and 37 per cent higher than at the same point last year.
Annual growth in credit card lending slowed to 5.1 per cent in October from 5.5 per cent in September.

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