Have our politicians, policy-makers, and other leaders failed society by acting too late to deal with global financial flows into the Metro Vancouver property market? Was the best time for action already several years back? If so, now what?
(Update January 2016. We published this in May 2015, but it is still as relevant as ever, in the midst of BC Assessment reports of price jumps, and Vancouver Mayor Robertson, calls for action — by federal and provincial government. But we ask, did he and his regime let us down as soon as first elected in 2008 by failing to pursue the real underlying drivers of unaffordability?)
A reader has alerted us to an article entitled “Auckland’s housing boom could prove unstoppable” (10-May-2015, by Shabnam Dastgheib, in Stuff, New Zealand). One excerpt: “…housing booms and busts are lasting longer and when governments take a “wait and see” approach to those cycles, they can spiral out of control.” That article led us to a study entitled “Booms, Busts, and Normal Times in the Housing Market” (by Agnello, Castro, and Sousa).
Quoting one review of the study: The authors conclude that the time-varying nature of housing cycles provides a rational for preventive policy interventions during booms and busts. “In particular given that the duration of housing boom and housing bust episodes is conditional on their own age, a timely policy response to such events is crucial to keep them under control.”
So …. here there we are now on the housing graph above. We are the peak, and many predicting it will continue unabated. Now what?
Below we include excerpts of the article, plus material about the underlying study.
“Auckland’s housing boom could prove unstoppable”
(by Shabnam Dastgheib, Stuff, 10-May-2015)
Auckland’s house prices hit an all-time high this month, with homes selling at an average of just under $810,000.
Auckland’s seemingly unstoppable housing market could be booming for a while yet, and the longer it lasts the less likely it is intervention will be effective in stopping it, a new US survey shows.
The statistical analysis of of 20 industrial countries including New Zealand since 1970 has found that housing booms and busts are lasting longer and when governments take a “wait and see” approach to those cycles, they can spiral out of control.
The longer the booms like the one Auckland is experiencing last, the less likely it is that intervention will be effective. Auckland’s house prices hit an all-time high this month, with homes selling at an average of just under $810,000, up nearly 50 per cent from $546,488 at the peak of the last property boom in 2007. House prices in New Zealand’s largesty city rose 14.6 per cent in the past year, including 4.3 per cent in the past three months.
The paper, Booms, Busts, and Normal Times in the Housing Market by the American Statistical Association appeared in the Journal of Business and Economic Statistics and was publicised this month.
The paper’s authors say their findings support preventive policy interventions by governments during boom times and emphasise the need for timeliness.
A counter-cyclical policy was needed before housing booms and busts reached 26 quarters in order to avoid large and persistent housing price swings and to speed up the return of the market cycle to a normal phase.
… The report found the longer the boom time, the most likely it was to cause havoc on the markets and the same was true for busts which were more likely to turn into chronic slumps the longer they were in place.
Chronic slumps could lead to severe recessions.
… Eaqub pointed to social, economic and financial risks if urgent action wasn’t taken and said a longer boom was not desirable. “The longer house price booms go, the more speculative they become. The more house prices rise, the more people speculate that house prices will rise further and buy more houses at even higher prices, typically with loads of debt.”
Eaqub said countries like New Zealand, Australia and Canada had had successive housing booms because they had broken housing markets. “Policy makers have already proven that then can do nothing to effectively stem the rise of house prices. Similarly, they have no ability to engineer a soft landing or crash in the housing market.”
Squirrel Mortgages managing director John Bolton said the issue of a housing boom was not just happening in Auckland but in cities all over the world and there was no easy fix.
Bolton said governments had left the issue up to their central banks to solve which had led to a very one-sided situation….
Booms, Busts, and Normal Times in the Housing Market May 2015
Luca Agnello of the University of Palermo, Vitor Castro, University of Coimbra (Portugal), and Ricardo M.Sousa University of Minho, (Portugal) and London School of Economic, were prompted to do their study by the prolonged housing bubble following the dot-com bust in the early 2000s followed by the recent housing crisis.
We assess the existence of duration dependence in the likelihood of an end in housing booms, busts, and normal times. Using data for 20 industrial countries and a continuous-time Weibull duration model, we find evidence of positive duration dependence suggesting that housing market cycles have become longer over the last decades. Then, we extend the baseline Weibull model and allow for the presence of a change-point in the duration dependence parameter. We show that positive duration dependence is present in booms and busts that last less than 26 quarters, but that does not seem to be the case for longer phases of the housing market cycle. For normal times, no evidence of change-points is found. Finally, the empirical findings uncover positive duration dependence in housing market booms of European and non-European countries and housing busts of European countries. In addition, they reveal that while housing booms have similar length in European and non-European countries, housing busts are typically shorter in European countries.
A statistical analysis of data from 20 industrial countries covering the period 1970 to 2012 suggests housing market pricing cycles — normal, boom and bust phases — have become longer over the last four decades.
The study also found that longer down phases can have dire consequences on national and international economies. While relatively short-lived housing booms tend to deflate, more prolonged booms are likely to spiral out of control. Similarly, compared to short housing busts, longer housing busts are more likely to turn into chronic slumps and, ultimately, lead to severe recessions.
Results of the analysis recently were included in an article in the Journal of Business & Economic Statistics, a professional journal published by the American Statistical Association. The study was conducted by Luca Agnello, University of Palermo (Italy); Vitor Castro, University of Coimbra (Portugal); and Ricardo M. Sousa, University of Minho (Portugal).
Other key study findings include the following:
Housing price booms and busts — and even normal phases — tend to be longer when the previous cycle, no matter the type, is long.
Housing price booms are broadly similar in terms of length in European and non-European countries, but pricing busts are typically shorter in European countries.
There is a positive duration dependence in the housing market price booms of European and non-European countries, while the housing price busts in non-European countries do not seem to be duration dependent.
The results corroborate the existence of a time-varying duration dependence parameter for housing booms and busts. Housing booms and busts that last fewer than 26 quarters display positive duration dependence, but the same does not hold for older events. For example, when housing booms or busts have a duration shorter than 26 quarters, each additional quarter of duration — on average — increases the likelihood of the end of such stages of the cycle by 4 percentage points. In contrast, for housing booms or busts longer than 26 quarters, each additional quarter of duration raises the likelihood of their end by only 1.76 percentage points. For normal times, no evidence of change-points is found.
The authors conclude the study’s findings support preventive policy interventions by governments during periods of boom and bust. A timely counter-cyclical policy response before housing booms and busts reach 26 quarters on average is crucial, they say, for avoiding large and persistent housing price swings and for hastening the return of the housing market cycle to a normal phase.
The above story is based on materials provided by American Statistical Association. Note: Materials may be edited for content and length.
Luca Agnello, Vitor Castro, Ricardo M. Sousa. Booms, Busts, and Normal Times in the Housing Market. Journal of Business & Economic Statistics, 2015; 33 (1): 25 DOI:
American Statistical Association. “Housing market cycles have become longer.”
ScienceDaily. ScienceDaily, 1 May 2015. <www.sciencedaily.com/releases/2015/05/150501151614.htm>
Intervention Policy is Best for Housing Boom/Bust Cycles
Posted by: member May 05, 2015 in Morgage News
After looking at housing booms and busts in 20 countries, three economists have concluded that the likelihood of a boom ended in a housing market cycle depends on its age – that is that the longer the cycle continues, the probability that it will end increases (positive duration dependence). They did not find the same was true of housing busts.
The three, Luca Agnello of the University of Palermo, Vitor Castro, University of Coimbra (Portugal), and Ricardo M.Sousa University of Minho, (Portugal) and London School of Economic, were prompted to do their study by the prolonged housing bubble following the dot-com bust in the early 2000s followed by the recent housing crisis.
Their article, Booms, Busts, and Normal Times in the Housing Market, notes that against the background of the subprime boom, and subsequent Great Recession and long and persistent slump in the housing market, it became a policymaking priority to investigate the determinants of this boom-bust behavior.
Research done in 2011 and 2013 indicated that while housing busts showed no evidence of positive duration experience it did seems that there was lagged duration dependence – that is housing downturns are less likely to end when the preceding upturn was abnormally long.
The research, published in the American Statistical Association Journal of Business and Economic Statistics, sought to answer these questions:
- How long are housing booms, business and normal times likely to last?
- How similar or different are these phases in European and non-European countries?
- Does the end of a boom or bust depend on its own age?
- Is the duration of each cycle smooth or bumpy?
- Has the duration of market cycles changed over time?
The authors first identified the various stages of housing market cycles then looked at data for 20 industrialized countries spanning a period from the first quarter of 1970 to the second quarter of 2012, and constructing a continuous time Weibull model. They found that the likelihood of both booms and busts and to some extent normal cycles coming to an end increases over time and that each tends to be longer than the previous phase of the cycle, no matter its type. They also found that the duration of the different stages of the housing markets has increased over recent decades.
Looking at differences between European and non-European countries including the U.S. they found housing booms to be broadly similar in terms of length but the busts to be shorter in European countries. There was also a positive duration dependence in booms of both European and non-European countries but housing busts in non-European countries do not seem to be duration dependent.
They also corroborated the existence of time-varying duration dependence for booms and busts. “In particular, we find the housing boom and busts that last less than 26 quarters display (positive) duration dependence, but the same does not hold for older events.” When booms or busts) have a duration shorter than 26 quarters each additional quarter on average increases the likelihood of the end of the stage by 4.01percentage points in booms and 7.01 percentage points in busts. In contrast, in those longer than 26 quarters each additional quarter raises the likelihood of their end by only 1.76 (boom) and 3.68 (bust) percentage points.
The authors say that from a policy perspective the study provides information that can be useful for predicting the timing and length of boom-bust cycles and thus in designing and implementing stabilizing policies. Moreover, by looking at the stages of housing cycles across groups of countries it contributes to a better understanding of the degree of synchronization of housing prices globally.
While they stress they cannot draw predictions and policy implications for specific countries their key finding is that, while relatively short-lived housing booms tend to deflate, more prolonged booms are likely to spiral out of control and longer term busts when compared to shorter ones are more likely to turn into chronic slumps and lead to severe recessions.
The authors conclude that the time-varying nature of housing cycles provides a rational for preventive policy interventions during booms and busts. “In particular given that the duration of housing boom and housing bust episodes is conditional on their own age, a timely policy response to such events is crucial to keep them under control.” They say that a counter-cyclical policy intervention that takes place before that 26 quarter mark is key to smoothing out large and persistent price swings and speeding up the return to a normal phase. When booms and busts get too long, the likelihood of their end increases by only half when compared to shorter events making it more difficult to circumvent such episodes without avoiding financial distress and crisis management. “For this reason, a ‘wait-and-see’ strategy is not recommended for housing booms and housing busts lasting less than 26 quarters”
Source : mortgagenewsdaily[dot]com