IMF REPORT - HOUSING RECOVERIES: CLUSTER REPORT ON DENMARK, IRELAND, KINGDOM OF THE NETHERLANDS—THE NETHERLANDS, AND SPAIN Download
This report examines the experiences of four European countries that have had large house-price declines in recent years. In particular, it examines the experiences of Denmark, Ireland, the Netherlands, and Spain—four countries in which the house-price cycle has been especially large and that share a similar institutional environment (a common monetary policy and the EU’s institutional framework)—with a view to exploring how policies can best support economic recovery in the wake of a house-price bust.
These countries’ experiences share similarities, but also important differences. Shocks to house prices, unemployment, and bank balance sheets were most severe in Ireland and Spain, reflecting in part a higher amplitude of residential construction. However, the boombust cycle has, together with other shocks, left all four countries facing significant output gaps, as well as elevated levels of private-sector debt that pose headwinds for growth.
Promoting recovery following a house-price bust requires a multi-pronged strategy. Large house-price busts can leave countries facing wide output gaps, a highly indebted private sector, and weaker bank balance sheets. Addressing these problems simultaneously can be challenging, as efforts often involve trade-offs (e.g., faster deleveraging can widen output gaps). A careful and multi-pronged strategy is thus required to minimize trade-offs and accelerate sustainable recovery. Important progress has been made in this regard in all four countries. Priorities going forward vary across countries, reflecting their specific circumstances.
Measures that have assisted or could assist adjustment in at least some of the four countries include the following: (i) supportive macro policies; (ii) tax and pension reforms to ease liquidity constraints; (iii) reforms to financial regulatory and supervisory policies, tax policies, and insolvency procedures to facilitate more efficient restructuring of distressed debt; (iv) increased rental market flexibility (e.g., easing rent controls) to facilitate the conversion of vacant units into rental properties, boost construction of rental units, and facilitate mortgage-to-rent conversions for distressed mortgages; and (v) measures such as dividend restrictions to bolster banks’ ability to support recovery and absorb losses.
Reforms can also help reduce risks of a recurrence of the boom-bust cycle. The amplitude of future house-price cycles can be lessened by reforms to (i) reduce fiscal incentives for debt accumulation, (ii) make rental markets more flexible and efficient, and (iii) facilitate the deployment of macroprudential tools to avoid excessive debt accumulation during the upswing. To ensure that such measures do not dampen recovery but instead contribute to it, (i) macroprudential tightening could be gradual, calibrated to the pace of recovery, and offset by other supportive macro policies, as appropriate, and (ii) fiscal savings from reducing incentives for debt accumulation could, if needed, be used for high-multiplier stimulus and/or measures to boost potential output.
In the case of Netherlands, the report states that public support of social housing corporations through loans and guarantees could be phased out and replaced with a more targeted system of direct subsidies to lower-income groups.