We employ the duration analysis method to evaluate the effect of securitization as well as mortgage sector liberalization, and the involvement of government within housing finance upon the duration of booms, busts, and standard times in a group comprised of twenty OECD countries during the period 1970Q1 to 2015Q4. Our findings show that a shift towards an open mortgage sector is associated with more extended residential booms, whereas increasing securitization levels are associated with shorter busts in housing. It is also clear that the length of booms and busts mainly depends on housing finance characteristics; however, this does not appear to hold during regular times. Furthermore, government support measures are not always a cushion against the effects of housing bubbles. An in-depth analysis of their impact on distribution and also their impact on the balance between guarantee/loan and liquidity is required to avoid (longer) house booms. Overall, the housing finance regulations could be significant in protecting from the harmful impacts of housing booms and the risks to financial stability that come with the boom in housing. The policy of monetary policy is an essential supplement to macroprudential strategies. Additionally, government involvement in financing housing needs to be conceived in a manner to avoid an unwanted amplifying of the house price fluctuation.
“… The boom-bust cycle is generally thought of as one of the major causes behind the financial crisis that is sweeping across the globe and is widely regarded as the biggest financial threat that the world has encountered ever since Great Depression …”– Prakash Loungani (2010a, p.16).
Introduction
The bursting of the technological bubble in the 2000s pushed interest rates to record low levels, establishing the pattern of a boom in the price of housing in various developed nations. When the subprime mortgage market sank in the summer of 2007, the prices radically decreased, a long-lasting slump in the market for housing started, and the world economy witnessed what was known as the Great Recession.
These events drew an amount of discussion about the importance of the market for housing to explaining the fluctuations in the business cycle (Mallick & Mohsin, 2016; Dufrenot & Malik 2012) and the close connections to the financial sector (Granville & Mallick, 2009; Sousa 2010a, b).
The most important thing is that the extent and duration of the Great Recession – and its origins in the sub-prime mortgage sector of the housing sector lending – brought to light four essential aspects: 1.) It is crucial to understanding the complex effects of securitization as well as mortgage market development and changes on the duration of booms and busts. Footnote 12) that the significance of integrating the effect of the characteristics of housing finance and institutional differences in the mortgage market on the probability that housing bubbles (busts) conclude in a manner that is relevant for the creation of a macroprudential preventive instrument kit 3) the significance of a comprehensive assessment of the government’s involvement in housing finance to prevent the possibility of amplification of housing price fluctuations and 4.) the necessity to understand the specifics of different phases of the cycle as well as the particular factors that drive these (Loungani, 2010a; Igan et al. 2011, 2012). These are the primary objectives of our research paper.
Using quarterly data from the 20 OECD countries and discrete-time and continuous-time Weibull analysis, the authors have shown that being in the category of countries where the level of securitization in homes is high does have no significant impact on the duration of booms in housing. There is evidence, though weak, to suggest that a shift to liberalization of the mortgage sector is linked with longer-lasting housing booms. A one-unit increase in the level of liberalization of the mortgage sector decreases the probability of ending a housing boom by approximately 68.5 percent. However, when the level of securitization or development in the mortgage market is high, the duration of a housing bust tends to be less long, with the probability of a housing boom closing increasing by a ratio of around 1.5.
We also observe that the duration of the busts and booms is especially sensitive to certain aspects of housing finance. For example, the withdrawal of mortgage equity tends to extend the duration of booms in housing and reduce the bust duration. So, suppose households can take advantage of the accumulated equity in their housing and increase their credit score with rising house prices because debt service-to-income ratios are low. In that case, a high average of the typical term (in years) can help prolong the duration of home booms. There is evidence that suggests that more extended booms in housing and shorter busts occur when (i) the issue of covered bonds is increasing, (ii) the typical ratio of loan to value is high, (iii) households can refinance the mortgage, as well (iv) it is possible to have certain flexibility regarding the adjustments of rates of interest. Therefore, high loan-to-value ratios make it easier for borrowers to borrow more debt, and the lack of late repayment fees facilitates households’ ability to refinance mortgage debt as interest rates drop. A more significant growth in this secondary market of mortgage loans is together with the ease of tapping funds for lenders through financial markets.
Ultimately, the economic impact of specific housing finance characteristics is of the first order. 🙂 an increase in the average term typical or a more excellent ratio of loan-to-value decreases the chance of ending a housing boom to 5.7 % or 2.5 %, respectively. 2.) The ability to withdraw mortgage equity grants up to a three-fold increase in the likelihood of a bust in the housing market closing. 3.) 1 percentage-point increase in the amount of bonds covered by a mortgage (as a proportion of outstanding residential loans) increases the risk of a housing bubble ending by almost two percent. Lastly,) A 1 percentage point increase in the ratio of mortgage debt to GDP increases the probability of an average period closing by nearly 1 percent.
In the final analysis of the government’s involvement in the housing finance field, our findings show that specific support measures may affect the duration of housing market cycles. Notably, the tax deductibility of mortgage interest is linked to more extended booms in housing, and capital gains tax deduction is associated with shorter periods of high-speed appreciation of house prices. Furthermore, the availability of loans or guarantees from state-owned financial institutions or those sponsored by the state and finance agencies could prolong the duration of booms in housing. In the case of housing busts, the evidence-based evidence supports the notion that greater involvement from the state in mortgage markets is not necessarily a protection against these market cycle periods. However, the early withdrawals (for purchasing a house) from provident funds to assist in supplying liquidity to the mortgage market is a viable option for decreasing the duration of housing busts.
From a policy point of view, Our research demonstrates that regulating housing finance could assist in limiting unwanted “boom-bust” house price fluctuations. Additionally, it demonstrates how monetary policy could crucially support this (Granville & Mallick, 2009; Mallick and Mohsin, 2010, 2016; Sousa, 2011b; Castro, 2011; Arslan and others. 2015a). In addition, it shows that the government’s involvement in financing housing needs to be planned carefully to prevent unintended outcomes (such as amplification of fluctuations in house prices).
The remainder part of this paper is structured in the following manner. The section ” Review of the Literature” examines the literature available on the housing market. The ” Modelling Approaches” section describes the econometric model, and ” Data” provides the information. The section ” Empirical Analysis” analyzes the empirical results. In the final section, the section ” Conclusions” closes.