Trond-Arne Borgersen

Reflections on LTV, risk and incentives in mortgage markets

Purpose – The purpose of this paper is to highlight the short run incentives for increasing LTV ratios that develop among mortgagees and mortgagors in the presence of excess return to housing. The paper provides a conventional framework for analyzing the capital structure of housing investments where higher LTV‐ratios comes about as stronger appreciation is met by increased mortgage rates and both mortgagees and mortgagors are short sighted.Design/methodology/approach – The comment applies a capital structure approach to housing investments, highlighting the return to home equity. The paper distinguishes between price and leverage gains and presents a framework where the excess return to housing provides incentives for increasing LTV ratios. To illustrate, the Norwegian housing market is applied. The paper discusses short run market developments and the potential need for macro prudential regulations while introducing credit risk policy, nominal return targets and risk pricing.Findings – The implementatio...

Housing Careers, House Price Dispersion and the Housing Market Multiplier

Abstract Housing markets reflect our housing consumption profile over the life cycle. As we age, marry and have kids, we seek larger dwellings and to a greater extent owner-occupied housing. The up-trading process has two key characteristics: first, it is equity induced. Second, it impacts both the supply and demand sides of housing markets. This is our point of departure. The paper combines a housing ladder with a house price index to show how up-trading amplifies shocks and introduces a multiplier into the housing market. The interplay between market segments results in up-trading induced price dispersion and a price response in the segments on top of the ladder that exceeds those of segments further down, even when shocks are equal across market segments. Finally, as up-trading impacts both housing supply and housing demand, even balanced shocks to net demand might impact house prices. Focusing on different market segments, shocks to demand might have both direct (the size effect) and indirect (the up-trading effect) effects on the house price index. This paper highlights policy options at a finer level when in need of stimulating or dampening house price cycles.

A comment on mortgage procylicality

This paper comments on mortgage procyclicality. A framework for credit constraints along the lines of Kiyotaki and Moore (1997) is applied to illustrate a potential regime shift in the credit risk assessments of mortgagees. Depending on the relationship between house price growth and the alternative rate of return the weight given to collateral and debt-servicing ability may vary according to the house price cycle as mortgagees engage in search-for-yield. The regime shifts induced by increased global liquidity and expectations of continued housing appreciation might stimulate owner-occupation and LTV-ratios and induce mortgage procyclicality.

Inflation in Latvia

This paper applies and extends the Scandinavian model of inflation for analyzing determinants of inflation in Latvia during the period 1996-2007. Until the outbreak of the financial crisis in 2007, high inflation was a persistent problem for advocates of Latvian participation in the Euro collaboration. By allowing for transitional effects and separating the impact of nominal and real factors on inflation, where real factors are related to the structural shifts at the heart of transition economies, we render the inflation history more understandable. We show that the effects accompanying real factors constitute the key component of overall inflation over the twelve-year period of observation, keeping nonstructural inflation below the Maastricht criteria for most of the period. The real contribution of real factors to inflation provides Latvia with better prospects for future growth and higher standards of living, and hence should be less worrisome than the nominal contribution. Still, when it comes to compliance with the Maastricht criteria, the Economic and Monetary Union makes no distinction between the two, complicating convergence for transition economies.

Housing Careers, Price–Rent Ratios and Rental Equivalence

Abstract This paper analyses price–rent (PR) ratios under different housing career structures. A housing market with three segments for owner-occupation and a segment with rental housing is applied. A housing career is characterized by how households move between rentals and owner-occupied housing. While rents are completely passed through to the house price index when rentals represent alternative housing to all forms of owner-occupation, non-constant PR ratios are derived from more realistic housing career structures. In the presence of equity induced up-trading housing markets dominated by family homes are likely to see short-term deviations in PR ratios exceeding those of housing markets dominated by starter homes.

Housing appreciations and the (in)stable relation between housing and mortgage markets

This paper highlights the knife-edge distinction between stable and instable relations between housing and mortgage markets. Housing appreciations and mortgage growth are related to housing market fundamentals and the interrelation between house prices and mortgage supply. These are again linked to debt-servicing ability and collateral, the two main components of a mortgagees lending policy. The equilibrium relation between housing and mortgage markets is, while stable in scenarios where debt-servicing dominates, instable when collateral dominates the relation. The knife-edge that separates the regimes is a critical rate of appreciation and the accompanying critical leverage gain. Highlighting the knife-edge that separates these two well-known regimes, we provide a non-technical framework where conventional credit-risk assessments provide a rationale for macro-prudential policy.

Equity induced up-trading and the housing market structure: Implications for price-to-income (PTI) and macroprudential interventions

Purpose - – The purpose of this paper is to highlight the importance of home equity and the interplay between market segments for housing market developments. The intention is to show that it is not only the aggregate equity gain but also the distribution of equity gains between segments that matter for how shocks to income impact house prices. Design/methodology/approach - – The paper sets out a linear housing market model with three segments. Households trade up a housing ladder and link the three segments for owner-occupied housing. The up-trading is equity-induced. An expression for the house price index, which is related to the market segment prices both directly through the segment size and indirectly through a segment position on the housing ladder is derived. The author considers the price effects of shocks to income in four housing market regimes. Findings - – The heterogeneous housing market model shows how the interplay between segments impacts housing markets. When considering shocks to income, short-run deviations in the price-to-income (PTI) ratio compared to their long-run equilibrium due to equity-induced up-trading were found. The extent of PTI overshooting is related to the intensity of equity-induced up-trading between different segments. The market structure necessary to eliminate such overshooting is contingent on the distribution of equity gains between segments. Finally, the paper shows how the price effects of macroprudential interventions might be non-negligible when indirect effects are taken into account. Originality/value - – The linear housing market model with three market segments introduces a framework where the intensity of equity-induced up-trading in different market segments can be analyzed. This distributional aspect is, to the best of the authors knowledge, novel. The context-specific relation between housing market structure, equity-induced up-trading and short-run deviations in the PTI ratio provides a foundation for future research.

Mortgage Supply, LTV and Risk Pricing

This paper focuses on mortgage supply and its contribution to the loan-to-value (LTV)-ratio. The paper starts by finding the optimal LTV-ratio for a profit-maximising mortgagee that supply mortgages using housing as collateral. As the LTV-ratio represents the mortgagees risk exposure, the optimal LTV-ratio is one where the mortgagee is paid for its actual risk exposure. Thinking in terms of social welfare, the profit-maximising LTV-ratio is also optimal for society in our supply side framework. When including additional characteristics from the supply side of the mortgage market, the paper shows how the profit-maximising LTV-ratio varies according to moral hazard, risk pricing, funding structures, lending volumes and collateral values. The supply side characteristics create a wedge between the profit-maximising LTV-ratio and the LTV-ratio optimal for society. The model helps understand the role of mortgage supply in the period preceding the financial crisis, where LTV-ratios increased considerably. Consequently, it also allows for straightforward arguments regarding macro-prudential policy. Highlighting risk exposure, the paper continues by analysing the risk pricing response to falling house prices and an LTV-ratio that exceeds the LTV-ratio at origination. The paper finds a kinked-relation between the mortgage rate and the LTV-ratio ex post, separating risk pricing ex ante and ex post.

Industrial structure and jobless growth in transition economies

Abstract When does employment growth mirror aggregate growth? Applying a two sector model, where productivity growth differs across sectors of production, this article is concerned with a feature characterising a number of transition economies: a divergence between production and employment growth. In our framework the industrial structure that allows employment growth to mirror output growth is endogenous, and related to a number of industry- and economy-wide characteristics. The article shows how the critical industrial structure necessary for avoiding ‘jobless growth’ is context-specific, questioning a ‘one size fits all’ policy approach when aiming to fulfil the Europe 2020 Strategy.

Are the traditional trade-exchange rate theorems relevant for developing countries facing entry costs in international markets?

This paper investigates the relevance of traditional trade-exchange rate theorems for developing countries facing sunk entry costs in international markets. Firstly, the theorems analysing pricing of tradable goods and the trade balance dynamics following exchange rate shocks are accounted for. Secondly, the sunk cost hysteresis model of foreign trade is described, including the possibility for hysteresis both at the microeconomic and macroeconomic level. Finally, the implications of sunk cost hysteresis for the predictions of the traditional trade-exchange rate theorems are discussed. This paper argues that the sunk cost model provides a microeconomic basis for trade dynamics that allows for non-linearities and regime switches, something often seen in empirical analysis. When it comes to policy, this paper argues in favour of context-specific policy interventions and against the one size fits all approach of structural adjustment programmes.