Abstract
It is a well-known fact that the housing market, with its associated mortgage securities, plays a crucial role in modern economies. The recent crisis of 2007, triggered by the U.S. real estate bubble, confirms this key role and suggests the importance of regulating mortgage lending. This paper investigates these issues by designing a housing market with a linked mortgage lending instrument in the Eurace agent-based model. Our results show that the presence of a housing market in the model has relevant macroeconomic implications, driven mainly by the additional amount of endogenous money injected into the economy by new mortgages. This additional money generally helps to support and stabilize aggregated demand, thus improving the main economic indicators. However, if the regulation of mortgage lending is too lax, involving an increase in the debt-service-to-income ratio (DSTI), then the additional supply of mortgages no longer enhances macroeconomic performance, and the stability of the economic system is undermined. Based on a number of recent discussions, a regulation of stock control that targets households’ net wealth (a stock), rather than income (a flow) is designed and analyzed. The results show that regulation of stock control can be combined effectively with DSTI to increase the stability of the housing market and the economy as a whole. Interestingly, the regulation based on stock control also directly affects mortgage distribution among households, avoiding excessive concentration. From a policy perspective, our results suggest that the use of a mild flow control regulation, coupled with a stricter stock control measure, fosters sustainable growth and eases first-time buyers access to the housing market, encouraging homeownership.
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Notes
DSTI is often defined simply as the Debt-Service-Ratio (DSR).
The British parliament approved regulations granting powers to the Financial Policy Committee over housing tools, and specifically regulating residential mortgage lending using LTV and DTI ratios on March 25, 2015. These measures came into force on April 6, 2015.
See the speech entitled “The household debt ratio is an unsuitable risk measure - there are much better ones” delivered by Lars E.O. Svensson, a Resident Scholar at IMF (https://larseosvensson.se/2014/05/19/the-household-debt-ratio-is-an-unsuitable-risk-measure-there-are-much-better-ones/).
A calendar month is defined as a set of 20 days; a calendar week is five days.
This provision is aimed smoothing the production plan over time and then reducing oscillations of input demand.
The Cobb-Douglas production function is used widely in economics literature and has been employed in the base Eurace model that we extended in this study. However, the Cobb-Douglas function has often been criticized for being theoretically weak and unrealistic [see Shaikh (1974) and Labini (1995) among the many]. Replacing the Cobb-Douglas production function with the Leontief or other production functions may possibly be considered for the Eurace model, along with a dedicated study on comparison of different production functions under an ABM simulation environment.
If available liquidity is not even sufficient to meet compulsory payments, i.e. debt service and taxes, then the firm enters a process called illiquidity bankruptcy, where the firm fires all workers and remains inactive until it is able to raise the necessary funds on the stock market.
In particular, each firm updates the value of its net worth, and if equity becomes negative, the firm is declared insolvent. In that case, it enters a special process called insolvency bankruptcy, where the firm fires all workers, undergoes debt restructuring with a related loan write-off and a corresponding equity loss on creditor banks’ balance sheets, and remains inactive for a period of time, after which it re-enters the market with a healthy balance sheet. Physical capital of insolvent firms is therefore not lost, but simply remains inactive for a while.
The reservation wage is set at the last received wage, and is then heterogeneous among households.
Unemployment benefit is set at a fraction \(\xi _U\) of the last salary received by the household.
The transfer payment is set at a fraction \(\xi _T\) of the average wage among households.
The liquid wealth is given liquidity plus the market value of the stocks and government bonds portfolio.
The number of public employees is set at a fixed percentage \(\xi _G\) of the total household population.
Please note that in each boxplot shown in this paper, the line dividing each box into two halves is the median value, where each half corresponds to a quartile of the underlining distribution. The diamond-shaped point denotes the mean of the distribution. All observations from the entire runtime of each simulation seed are used to calculate the values that determine the shape of the boxplot, and hence the distribution of the variable observed.
See, for instance, the Bank of England Quarterly Bulletin 2014 Q1.
See (Muellbauer 2012). This demonstrates that housing wealth does not have a very strong impact on the consumption level. The study is based on data from developed countries.
Household consumption depends on a precautionary saving motivation, determined by a target ratio \(\omega _C\) of liquid wealth \(W_h\) to total net income \(y_h^{net}\) (see Eq. 5).
For a recent overview, see the box “Stylized Facts of Money” in ECB (2013).
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Ozel, B., Nathanael, R.C., Raberto, M. et al. Macroeconomic implications of mortgage loan requirements: an agent-based approach. J Econ Interact Coord 14, 7–46 (2019). https://doi.org/10.1007/s11403-019-00238-5
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DOI: https://doi.org/10.1007/s11403-019-00238-5