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Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga
The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector.
Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga

I. Introduction The commercial real estate (CRE) sector has been severely affected by the COVID-19 crisis. 1 Commercial property transaction volumes and prices plummeted globally in the second quarter of 2020 as containment measures taken in response to the pandemic adversely affected economic activity and reduced the demand for commercial property. Some markets, especially in Asia, rapidly recovered from the initial shock, but protracted social distancing restrictions continued to hold back occupier demand in various economies and contributed to an

Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga

views of the IMF, its Executive Board, or IMF management. Abstract The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced

Andrea Deghi, Mr. Fabio M Natalucci, and Mahvash S Qureshi

Introduction 1 In the runup to the COVID-19 pandemic, the commercial real estate (CRE) sector had been booming globally. CRE prices rose annually at about 6 percent on average during 2009–19, with North America experiencing the steepest increase ( Figure 1 , panel 1). 1 This trend reversed at the onset of the pandemic as CRE prices plummeted, particularly in Europe and North America, and in the retail segment ( Figure 1 , panels 2–6). 2 Aggregate CRE prices started to rebound in late 2020 and early 2021, but considerable disparity remains across regions

International Monetary Fund. Monetary and Capital Markets Department
While Norway’s institutional arrangement for macroprudential policy is uncommon, the authorities have shown strong willingness to act. The Ministry of Finance (MoF) is the sole macroprudential decision-maker in Norway, which is rare in international comparison. However, Norges Bank and the Finanstilsynet (FSA) play important advisory roles. In recent years, the authorities have taken substantive and wide-ranging macroprudential policy actions in response to growing systemic vulnerabilities—and these seem to have been effective in slowing down some of the riskier trends. The macroprudential policy toolkit is well stocked and actively used.
International Monetary Fund. Monetary and Capital Markets Department

. Structural Vulnerabilities: Assessment, Tools, and Recommendations BOXES 1. Bilateral and Tri-party Meetings Between the MoF, Norges Bank and the FSA 2. International Comparison of Debt Limits and the Use of Speed Limits 3. International Comparison of CRE Vulnerabilities 4. Use of Macroprudential Tools Geared Towards the CRE Sector 5. Key Characteristics of the Norwegian CRE Market FIGURES 1. Institutional Arrangements for Macroprudential Policy 2. Macroprudential Policy Actions since 2008 3. The Macroprudential Policy Process 4. Key Reports

International Monetary Fund. Monetary and Capital Markets Department

. Publish a list of all recommendations made by Norges Bank and the FSA to the Ministry of Finance in the Annual Financial Market Report to Parliament (Paragraphs 17, 25). MoF I Systemic Risk Monitoring 5. Collect micro-data on NPLs and financial distress for households and link the information to existing micro-data sets to guide calibration of borrower-based tools (Paragraphs 33–34). NB, MoF ST 6. Collect micro-data on the CRE sector to facilitate risk assessment and guide the development and calibration of macroprudential policy

Andrea Deghi, Mr. Fabio M Natalucci, and Mahvash S Qureshi