1. Discussion of ‘On the importance of borrowing constraints for house price dynamics’ by Eerola and Määtänen Kalin Nikolov Bank of England and LSE September 2008

2. Motivation and questions Finland had a huge housing boom-bust cycle during the 1985 - 1995 period –50% increase 1985-1990 –50% fall: 1990-1993 Two key candidate explanations –Financial liberalisation in the 1980s: much lower down-payments for house purchase –A severe recession in early 1990s – GDP down 20% The paper studies this episode. 2 key questions –How does the down-payment affect housing prices in a model calibrated to the Finnish economy? –Can the model replicate the Finnish boom-bust cycle?

3. Answers Lower down-payments increase steady state housing prices Down-payments introduce asymmetric dynamics following income shocks The 1990s boom-bust cycle –Cannot match the 50% housing price increase by appealing to lower down-payments –Can match the 50% fall in prices using permanent income and interest rate shocks –But: permanent shocks cannot explain the rapid subsequent recovery

4. Modelling framework Small-open endowment economy OLG households – live for 10 periods –Enjoy houses and non-durables (and bequests) –Collateral constraint for house purchase Fixed housing supply Calibrated to the 2004 Wealth Survey of Finnish households Consider perfect foresight dynamics after one- time shocks

5. Main comments I enjoyed reading this paper Focus comments on two aspects –Should we necessarily expect lower collateral requirements to increase the steady state demand for housing? –Is the fixed housing supply assumption innocuous?

6. Do lower collateral requirements increase steady state housing demand?

7. Why lower down-payments lead to higher steady state housing prices Lower down-payment requirements allow young households to increase expenditure on both housing and non-durables Older households unaffected because they are unconstrained Higher aggregate housing demand – leads to higher prices due to fixed supply

8. Importance of rental markets When renting is ‘allowed’, poor households rent so as not to have to save for a down-payment When down-payment requirements are reduced, the poor households borrow and purchase their rented houses. Not necessarily a large change in steady state aggregate housing demand So housing price largely unaffected

9. Does housing investment matter for housing prices?

10. Housing supply The endogenous response of housing supply matters in a forward-looking model The elasticity of housing supply varies greatly across countries and this matters a lot for housing prices –Housing investment: 3-4% of GDP (UK), 6% (US) –Volatility of housing prices is higher in the UK –Average growth of real UK housing prices higher despite lower GDP growth How elastic is supply in Finland?