How businesses are surviving the Covid-19 shock

How businesses are surviving
the Covid-19 shock
By Sebastian Barnes, OECD Economics Department, and Robert
Hillman, Neuron Capital.

As the economy locked down in March 2020, there were big
concerns about how businesses would survive being unable to
open normally with retail premises, offices, factories and
construction sites closed. There was a fear that these
pressures could trigger a “domino effect” that would ripple
through the business sector, leading to widespread job losses
and bankruptcies.

The Corporate Sector Agent-Based (CAB) Model was developed to
look at these questions, taking into account the differences
across firms in their activities and financial strength, how
firms interact with each other through customer-supplier
networks, the rule-of-thumb adjustments firms make and the
risk of bankruptcy. Agent-based models are simulation models
that build up the behaviour of the aggregate economy from the
interaction of individual units. This can lead to insights on
aggregate and microeconomic behaviour.

The CAB takes a data-rich approach to building a model of the
United Kingdom business sector based on the Input-Output
connections between sectors, firm characteristics from ORBIS
data and evidence on network connections between firms. In the
real world, many firms are heavily reliant on a small number
of suppliers and customers. Matching final demand to the
downturn in UK output during the Covid-19, the model sheds
light on the mechanisms at work and alternative policy
scenarios.

In the absence of any policy response, the Covid-19 shock
would have led to a large and lasting fall in output: over 15%

of firms would have failed in the first two years, far above
the normal rate and similar to during the Global Finanicial
Crisis. Almost a quarter of firms in the Accommodation and
Food sector would have failed. The reasons for individual firm
failure are multi-factored and simple “domino effects” are
rare.

The UK rapidly mobilised a large-scale firm-level support
programmes from spring 2020, including the Coronavirus Job
Retention Scheme (CJRS) “furlough” program and a credit
guarantee that helped businesses to borrow.

The massive policy response has been highly effective in
supporting output and avoiding firm failure. The initial fall
in output was reduced and the policy support allows activity
to recover after two years to close to what it would have been
without Covid-19.

Figure 1. With massive policy support, the depth and
persistence of the Covid-19 loss of output has been reduced

Source: Authors’ calculations based on CAB model.
The model predicts that the rate of firm failures with this

policy support should be lower than in normal times, as has
been observed in the UK bankruptcy statistics to date. As the
Table shows, this counterintuitive outcome reflects the fact
that policy has protected almost all the previously profitable
firms that would have failed as result of the Covid-19 shock,
but also allowed more than half of firms that would have
failed in normal times to survive.

Table 1. Policy supports have protected firms hard hit by
Covid-19 and also supported firms that were already vulnerable
% share of firms

The survival of less productive firms raises the risks in the
years ahead of unproductive “zombie firms” weighing on
productivity. They may be joined by other firms that were
previously successful, but whose business models have been
permanently disrupted by Covid-19 and its effects. These firms
may be able to survive financially for a long time, but have
little prospect of contributing to the growth of the economy.

Could policy have been better targeted?     An approach, for
example, of only helping previously profitable firms or those
in severely affected sectors would have led to fewer
inherently weak firms surviving, but at the cost of lowering
incomes for workers and slowing the recovery. Given the many
challenges of targeting, the use of broad supports during the
Covid-19 crisis appears justified.

Further reading

Barnes, S., R. Hillman, R., G. Wharf and D. McDonald et al.
(2021). “The impact of Covid-19 on Corporate Fragility in the
United Kingdom: Insights from a new calibrated firm-level
Corporate Sector Agent-Based (CAB) Model”, OECD Economics

Department Working Papers, No. 1674, Paris, OECD Publishing

Demmou, L. et al (2021), “Insolvency and Debt Overhang
Following the Covid-19 Outbreak: Assessment of Risks and
Policy Response”, I OECD Economics Working Paper, No. 1651,
Paris, OECD Publishing

Hillman, R., S. Barnes, G. Wharf and D. McDonald et al.
(2021). “A new firm-level model of corporate sector
interactions and fragility: the Corporate Agent-Based (CAB)
Model”, OECD Economics Department Working Papers, No. 1675,
Paris, OECD Publishing.

Reconciling housing and the
environment: is it possible,
and how?
By Grace Alexander, Ioannis Tikoudis, Katherine Farrow and
Walid Oueslati, OECD Environment Directorate

https://www.oecd.org/housing/policy-toolkit/
Ensuring widespread access to affordable housing constitutes a
significant policy challenge in many countries. Increasing
housing costs in urban areas push many to live in less

accessible locations and to lower their living standards. This
can reduce wellbeing, undermine social cohesion and eventually
jeopardize political stability. At the same time, another
policy challenge, equally urgent and multifaceted, emerges
from climate change and environmental degradation in urban
areas. The cost that climate change, air pollution and
biodiversity loss impose on modern societies is significant:
health, food systems and infrastructure are all affected, and
the consequences will only grow if these issues are left
unaddressed. Are the housing and environmental crises somehow
interrelated? Do governments have the relevant tools to pursue
affordability and environmental sustainability at the same
time?

How we build our urban areas affects housing markets and comes
with certain environmental costs. The residential sector
accounts for a large share of fine particulate matter (Figure
1), an air pollutant associated with severe health impacts,
with the sector responsible for 37% of the emissions of fine
particulate matter globally. Limits on building height and
density, applied widely around the world, reduce housing
supply and contribute to observed house price surges. Similar
regulations cause cities to spread outwards, causing
irreversible changes on the natural areas surrounding cities
and generating more greenhouse gas emissions per capita. The
phenomenon of rapid suburban expansion, which has come to be
known as urban sprawl, possessed tremendous momentum for
decades and continues to be a focal issue in urban development
today. Sprawled cities imply greater travel distances, make
residents more dependent on their cars and tend to increase
the cost of providing public transport services (OECD 2018).

Figure 1. Housing accounts for a large share of fine
particulate matter

Source: Air emission accounts, OECD Environment Database
Reconciling housing and the environment, published in the OECD
report “Brick by Brick”, provides an anatomy of such
practices, and their long run social cost. The chapter
explores ways to build our urban areas by balancing housing
affordability and environmental quality. It is not only that
housing policies affect the environment, the chapter reports,
but also that urban environmental policies can have a
significant impact on our house values. Reducing pollution and
increasing green spaces increase the value of nearby housing
stock. Although energy efficiency regulations may increase
construction costs, they also add value to homes that are
subject to such regulations. Importantly, the value that
environmental regulations can add to the existing housing
stock should not be confused with the rise in house prices
caused by mechanisms causing artificial scarcity, such as
regulatory constraints on housing supply.

Ultimately, the homes that we live in and the environment
around us are crucial to our health and wellbeing. By
considering the effect of the residential sector on the
environment, and vice versa, the chapter outlines how we may
be able to strike a sustainable balance between the two.

Further Reading:

OECD (2021), Brick by Brick: Building Better Housing Policies,
OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en.

OECD (2021), Reconciling Housing and the Environment., Brick
by Brick: Building Better Housing Policies, OECD Publishing,
Paris, https://doi.org/10.1787/96aaa66a-en

OECD (2018), Rethinking Urban Sprawl: Moving Towards
Sustainable       Cities,        OECD       Publishing,
Paris, https://doi.org/10.1787/9789264189881-en.

Fostering     a   resilient
recovery   and  sustainable
growth in Iceland
By Hansjörg Blöchliger and Vassiliki Koutsogeorgopoulou, OECD
Economics Department

Iceland went through a comparatively mild COVID-19 health
crisis. Containment measures were less severe than elsewhere,
and all domestic restrictions were lifted at the end of June
2021. Yet the economy suffered a lot. Following lockdowns and
travel restrictions worldwide, tourism, Iceland’s most
important export sector, collapsed with only around a fourth
of foreigners arriving in 2020 compared to the previous year.
GDP declined by 6.6% in 2020, and unemployment rose to 8%.

Even before the pandemic, other sectors had started to draw
level with tourism as growth engines. The pharmaceutical
industry continues to develop rapidly, and digital services
such as data processing and storage benefit from Iceland’s low

energy prices and cool and windy climate. Fisheries are
climbing up the value chain with fresh seafood and aquaculture
rising fast. Innovative carbon capture technologies help
reduce carbon emissions and provide export income.

Figure 1. The economy was hard hit as foreign tourism
collapsed

Note: Passengers who go through security at Keflavík Airport.
Source: OECD, National Accounts database; and Statistics
Iceland.

Macro policy supported households and firms
Like overseas, monetary and fiscal policy cushioned the blow
for households and firms. In addition, the government plans to
increase spending on infrastructure, digital and green
transition, and research and development by around 0.5% points
of annual GDP over the next few years, to ensure a healthy and
sustainable recovery.

Yet public debt could continue to rise since Iceland, as a
small open economy, is highly vulnerable to external shocks.
To maintain fiscal space, the government should start
consolidating once the recovery is firmly underway. Although
Iceland’s population is young and active, the government
should start addressing disability, pension and long-term care
spending.

Structural reform could help boost productivity
Regulation is restrictive, hampering sound competition.
Administrative burdens and an extensive licensing and permit
system slow the entry of new and innovative firms. Skills gaps
are considerable. To boost productivity and diversify the
economy, regulation particularly in the tourism and
construction sectors should be eased. The quality of
education, from primary to tertiary, should be better aligned
with the needs of economy and society.

Fostering innovation is crucial for strong economic
performance in the digital era
Innovation outcomes remain weak in some critical areas,
notably ICT. Despite generous R&D tax incentives, many smaller
firms have not been inclined to innovate. Icelandic firms
should also be encouraged to step up the adoption of digital
technologies, which would help the country make the most of
innovation niches. Improving framework conditions and easier
access to finance for young innovative firms are important. At
the same time, the provision of digital skills needs to be
strengthened and knowledge exchange enhanced, through closer
business-university collaboration on innovation.

Making climate action more cost-efficient and inclusive
Iceland’s per capita greenhouse gas emissions exceed the OECD
average, partly because of emission-intensive aluminium
smeltering. The government committed to reduce emissions from
their 2005 level by at least 40% by 2030. Iceland’s climate
policy should rely on effective carbon pricing, complemented
by investment in low-carbon technology and participation in
international projects to finance emission reduction in
transition and emerging market economies. Revenues from carbon
pricing could be redistributed to households and firms.

https://www.oecd.org/economy/iceland-economic-snapshot/

Enhancing digital diffusion
for   higher    productivity
growth in Spain
By Aida Caldera Sánchez, Müge Adalet McGowan and Yosuke Jin

Digitalisation is transforming the Spanish economy, changing
the way firms operate, with positive implications for
productivity. However, these changes are not evenly shared
between high and low productivity firms, or small and large
firms (Figure 1), which can help explain why aggregate
productivity gains from digitalisation have been modest in
Spain so far. Hence, Spain still has considerable scope to
reap the benefits of the adoption of digital technologies and,
perhaps more importantly, their effective use to produce new
business models and products, as discussed in the 2021
Economic Survey of Spain (OECD, 2021; Jin, 2021).

Figure 1. The adoption of digital technologies varies with
firm size
Percentage of firms which adopt each technology, 2019

Note: “Small firms” stands for small enterprises with 10-49
employees, while “Large firms” stands for large enterprises
with 250 employees and more.
Source: OECD, ICT Access and Usage by Businesses (database).
The pandemic has shown the benefits of a more digitalised
economy (e-commerce, teleworking) and accelerated the pace of
digital adoption, with the extent of teleworking and digital
sales increasing in Spain during the last year. The Spanish
Recovery, Resilience and Transformation Plan allocates 29% of
funds to digitalisation, which will help Spain achieve its
ambitious objectives laid out in its national digital
strategy, “Digital Spain 2025”. In this context of the
increasing importance of digitalisation in Spain, the Survey
analyses the challenges and opportunities that digitalisation
offers through three types of policies.

First, good communications infrastructure is a prerequisite to
adopt and use digital technologies. This is an area where
Spain ranks relatively well in international perspective, with
a high share of fibre in total fixed broadband subscriptions
and a relatively widespread internet usage. The coverage of
fibre networks in rural areas is also well above that in other
European countries (46% vs. 21%). Nonetheless, the digital
divide between urban and rural areas in Spain remains, even if
it has narrowed recently. Barriers to “rights of way” –
permission to install necessary equipment – are high in some

regions and municipalities, and should be reduced to lower
deployment costs.

Second, there are complementary factors that are key to take
full advantage of digitalisation. These include organisational
capital and managerial skills, R&D and digital skills. There
are important gaps in these areas in Spain. For example,
business investment in intangible assets and R&D are
relatively low.     To boost innovation and reap the full
benefits of digitalisation, the Survey recommends boosting
partnerships between the public and the private sector, for
example by enhancing the role of Technology Centres to
increase cooperation between research institutes and SMEs,
which need to innovate and use digital technologies more.

There is also ample room to develop ICT skills, especially for
low-educated and older people (Figure 2). Reducing the
mismatch between the skills employers need and the
qualifications of jobseekers should be a priority. This would
help in particular low productivity firms and low-skilled
people, making the benefits of digitalisation shared by all.
Targeting training to those with lower digital skills and
shifting financial incentives for lifelong training at least
partially to training programmes chosen by individuals rather
than employers would help achieve these outcomes.

Figure 2. There is room to develop digital skills
Percentage of respondents claiming to have basic digital
skills, 2019

Source: Eurostat, Digital skills (database).
Finally, policies, which raise competitive pressures and
sharpen incentives to better use digital technologies and
better access to finance, can also enhance the diffusion of
digital technologies. For example, the Survey recommends
fostering the implementation of the Markey Unity Law to reduce
regulatory differences across regions and facilitate the
growth and entry of new firms and this way encourage the
adoption of new technologies. It also recommends strengthening
targeted support to new and high-potential firms through
public guarantee schemes. In addition to these policies, which
facilitate the entry and expansion of innovative firms, it is
also important to ensure the efficient exit of non-viable
firms and restructuring of viable firms in temporary distress.
An effective insolvency regime can help reduce the barriers
and costs of firm restructuring or exit and facilitates
technological experimentation. In this context, promoting out-
of-court insolvency proceedings, especially for SMEs, is key.

References:

Jin, Y. (2021), “Enhancing digital diffusion for higher
productivity growth in Spain”, OECD Economics Department
Working Papers, No. 1673, OECD Publishing, Paris.

OECD (2021), OECD Economic Surveys: Spain 2021, OECD
Publishing, Paris, https://doi.org/10.1787/79e92d88-en.

A recipe                for        lower          house
prices
By Volker Ziemann, OECD Economics Department

https://www.oecd.org/housing/policy-toolkit/
Does housing need to become always more and more expensive
relative to other services, eating an ever-higher share of
income? This situation puts a strain on household finances,
making it complicated for people to move close to jobs and
often generating macro-economic or financial risks. The
economy’s capacity to meet the demand for housing and supply
dwellings where they are demanded is crucial to avoid these
excessive price and rent increases, contribute to
macroeconomic stability and facilitate residential mobility.
The OECD has recently launched a report entitled “Brick by
Brick: Building Better Housing Policies” to help analysts and
policymakers make better housing policies. At its core, one of
its chapters focuses on the fundamental drivers of housing
supply and demand and the relevance of housing policies to
ensure affordable and quality housing for all.

The empirical framework underlying the analysis builds on the
famous stock-flow model for housing in which i) a positive
(negative) shock to housing demand increases (decreases) house

prices, ii) higher (lower) house prices boost (reduce) housing
investment, and iii) higher (lower) supply of housing feeds
back into house prices and partly offsets the initial demand
shock. In this framework, demand and supply elasticities
jointly determine how much of a change in demand feeds into
prices and how much into construction.

Figure 1. Stock-flow model of housing

These elasticities depend to a great extent on housing-related
policies.

     Eliminating mortgage interest deduction, for instance,
     mitigates house prices increases amid demand pressures
     (lower demand elasticity).
     A high degree of decentralisation of land-use decisions
     is generally associated with more restrictive land-use
     policy settings consistent with the home-voter
     hypothesis (lower supply elasticity).
     Strict rental market regulation inhibits new
     construction by reducing the incentives to invest in

rental housing (lower supply elasticity).

These housing-related policies differ considerably across
countries. Accordingly, expected benefits from moving towards
best policy practices also vary across countries and policy
tools. Figure 2 illustrates the expected reductions in house-
price to income ratios.[1]

Figure 2. Housing affects society and the economy in multiple
ways

Note: Simulated change between 2020 and 2050 in the number of
years over which cumulated average household disposable income
equals the average price of a 100m2 dwelling (in years).
Source: OECD (2021), Brick by Brick: Building Better Housing
Policies, OECD Publishing.
Residential construction is simulated to expand by more than
20% in Sweden if rent control becomes as flexible as in New
Zealand, increasing the housing stock in 2050 by around 11%,
which could reduce house prices in Sweden by around 1.5 years
of disposable income for the typical 100m2 dwelling. Sweden,
alongside the Netherlands, would also be the largest
beneficiary in terms of housing affordability from eliminating
mortgage interest deductibility. New Zealand, in turn, could
boost affordability the most by streamlining the governance of
land-use policies across levels of government.

These examples illustrate the great potential of housing
policy reforms. Many more are discussed in the report. A
dedicated Policy Toolkit including an online Dashboard and
Country Snapshots allows policymakers to compare their
country’s housing outcomes and policies. Finally, a Policy
Action Tool helps implement such reforms by anticipating
synergies and trade-offs across various outcome dimensions.

[1] Measured by the reduction, compared to the baseline of no
policy-change, in the number of years over which cumulated
average household disposable income equals the average price
of a 100m2 dwelling.

Monetary policy and housing
markets: interactions and
side effects
By Ernest Gnan, Oesterreichische Nationalbank (OeNB) and the
                                    1
European Money and Finance Forum.

https://www.oecd.org/housing/policy-toolkit/
Monetary policy influences housing prices through the level of

interest rates (cost of credit, discount rate, attractiveness
vis-à-vis other investments). The housing market affects
aggregate demand through construction activity and its
influence on consumption (wealth and income effects). Housing
booms and busts can threaten financial and macroeconomic
stability, and thus ultimately also feed through to consumer
price inflation. Central banks can thus not ignore housing
market developments. But monetary policy is too crude an
instrument to target house prices. A new class of instruments
– macroprudential policies – has been created and fills this
gap since the Global Financial Crisis. Moreover, housing
prices are substantially driven by structural housing policies
which affect housing supply and demand. At the same time,
including owner-occupied housing in the consumer price basket
helps to adequately feed this important part of households’
expenditure into central banks’ reaction functions. While
monetary policies worldwide have undoubtedly played a central
role in containing the economic fallout from COVID-19,
potential side effects, such as shooting up housing prices,
and the proportionality of long-lasting unconventional
monetary policy measures need to gain increasing attention as
economies are bouncing back from the COVID crisis.

Why should central banks pay attention to a specific sector
such as the housing market?

Central banks worldwide are mandated with ensuring price
stability, subject to this (or in parallel with, as in the US
Fed) also with supporting growth and employment. Their price
stability objective is usually coined in terms of consumer
price inflation. Monetary policy is a rather “crude”
instrument, which affects aggregate demand broadly, and cannot
usually be targeted towards developments in specific sectors.
So, why should monetary policy care about developments in a
specific sector such as the housing market?

There are several channels in which housing is relevant for
the transmission of monetary policy impulses such as changes

in official interest rates or in bond market yields through
QE. First, the level of short-term and long-term interest
rates influences mortgage credit rates. So, it makes
purchasing a home more (or less) affordable. Thus, demand for
housing – and thus employment, aggregate demand and ultimately
also consumer price inflation – rises (or falls). Mortgage
loans make up 77% of euro area households’ total borrowing
(ECB, 2021). The growth of euro area mortgage loans continued
its upward trend observed since 2016 to reach around 5% in
nominal terms most recently. In 2019, in the EU and euro area
gross value added in the construction sector made up 5.4% and
5%, respectively, of GDP, with a wide range of 1.7% to 7.4%
across EU countries, though. Construction projects are
typically financed to a substantial extent through credit. So,
financing costs exert a potentially strong effect on
construction activity.

Figure 1. Housing makes up a major part of households’ lending
and is an important economic sector

Positive and negative wealth and income effects from house

price rises

Second, the value of an asset is influenced by the net present
value of the stream of income from this asset. In the case of
housing, this income can either be rental income or the
implicit income from using the house (in the case of owner-
occupied housing). If the discount rate falls (as implied by
lower official interest rates), then the net present value of
a home rises. Looser monetary policy thus, ceteris paribus,
raises real estate prices. This rise in housing prices can
affect household consumption in various ways. First, it can
entail that households feel richer and can take out an
additional mortgage on their house, to finance other
expenditures. In this case, we observe a positive wealth
effect. Conversely, rising house prices can also imply that
for instance young households need to spend a higher fraction
of the disposable income on housing, leaving less for other
consumption (see e.g. OECD, 2021). In this case, there would
be a negative income effect from rising house prices. Whether
the positive or negative wealth and income effects prevail,
depends on the fraction of homeowners versus tenants and
demographic factors. If, for instance homeowners benefiting
from wealth increases have a lower propensity to consume than
those just buying a home, the net effect on aggregate
consumption will likely be negative.

Similarly, rising rents (which are the likely consequence,
with some lag and to a certain extent, depending on countries’
institutional and legal frameworks, of higher house prices)
will benefit landlords, while tenants will have less of their
income left for other consumption. Assuming that renters are
wealthier and have a lower propensity to consume than tenants,
then a rise in house prices and rents will on aggregate dampen
consumption for non-housing goods. A very similar argument
applies to households which take out a loan to finance their
homes: higher house prices imply the need for a bigger loan,
implying lower disposable household income after loan

servicing.

Thus, the wealth and income effects from residential price
swings also imply substantial redistributive effects across
individuals and demographic groups (see e.g. OECD, 2021).

Figure 2. Real estate price developments in the euro area

Source: ECB (2021).
Housing booms and busts threaten financial and macroeconomic
stability

There is a second reason why central banks carefully look at
housing market developments, which has gained prominence in
the Global Financial Crisis (GFC): housing market bubbles can
trigger and fuel economic booms, which subsequently end up in
deep busts. Monetary policy can fuel such housing booms by
making credit very cheap, thus encouraging excessive leverage
among households. Real estate booms can also, at a more
structural level, entail that an excessive fraction of
economic activity goes into construction (as was the case in
several countries prior to the GFC). Once the housing bubble
bursts, a deep financial crisis can be the result, which
requires the central bank to take emergency measures to
prevent a collapse of the financial system, but also to dampen
the resulting recession and the accompanying excessive fall of
consumer price inflation, way below the central bank’s target,

potentially even into negative territory. Some economists thus
argue that central banks should “lean against the wind” in the
face of rising real estate prices. Even if the central bank
might not target asset prices, leaning against the wind might
be justified since it also helps to cushion excessive swings
in consumer price inflation which may be triggered by real
estate booms and busts. Others argue that such “preemptive”
monetary policy tightening entails high macroeconomic costs in
terms of foregone employment and output. Monetary policy is,
according to this view, too crude a tool to take real estate
prices into account and should exclusively focus on consumer
price inflation.

Macroprudential policies as a new tool to address housing
cycles

This is why, notably after the GFC, a consensus has emerged
that an additional set of instruments, “macroprudential
rules”, should be applied to cool down overheating asset price
developments, e.g. by raising loan-to-value ratios or loan
service-to-income ratios applied by banks when they grant
housing credits (see e.g. ESRB, 2021, ECB, 2021 and OECD,
2021). These new policies have been implemented around the
world and experience is accumulating in their application.
Note, however, that in practice the stylized notion of two
totally separate tools for two clearly distinct economic goals
– monetary policy to stabilize consumer price inflation, and
macroprudential policies to prevent asset booms and busts –
does not fully do justice to a far more complex reality.

Including owner-occupied housing in consumer price inflation
to better reflect households’ comprehensive cost of living
developments in central banks’ reaction functions

One way how home prices feed into the central bank’s reaction
function is by including the cost of accommodation in the
consumer price index. This is already the case for rents. By
contrast, at least in most European countries, it is not yet

the case for owner-occupied homes. This implies that the cost
of housing for owner-occupiers (including e.g. young families
buying a home) is neglected in the measurement of consumer
prices and thus in the central bank’s reaction function; it
also implies that house price bubbles risk to escape the
central bank’s formal reaction function. Including owner-
occupied housing is thus useful for improving the metrics used
to inform monetary policy.

Side effects and proportionality of monetary expansion gain
weight as economies bounce back from COVID

Another way how asset price developments, including house
prices, can enter the central bank’s reaction function is
through explicit consideration of side effects and the
proportionality of monetary policy measures. Not even the best
medicine comes without side effects. To take the current
situation of the COVID crisis, clearly central banks had to
step in to contain damage to our economies. Central banks are
aware of the “side effects” of these policies, such as rising
stock prices but also, in many countries, further rising house
prices. To contain the latter, e.g. the ECB explicitly
excluded mortgage credit from eligibility for meeting banks’
lending benchmarks in order to benefit from preferential
interest rates on the ECB’s Targeted Long-Term Refinancing
Operations (TLTROs).

As mentioned, asset price increases in general, and housing
price rises more specifically, may also entail large wealth
gains for those already owning these assets, implying large
distributive effects. Stronglyexpansionary, unconventional
monetary policies over long periods thus ultimately raise the
question of proportionality. It is not straightforward how to
weigh the benefits against the (potential) costs – there is
substantial uncertainty and any decisions ultimately rely on
careful judgement. What seems clear, though, is that as the
duration of expansionary monetary policy measures extends and
as signs of “ exuberance” in asset markets including

residential real estate markets intensify, while the economy
seems clearly back on track, the case for taking side effects
and proportionality duly into account is becoming more
urgent.

References

ECB (2021). Financial Stability Review, May.

ESRB (2021). Lower for longer – macroprudential policy issues
arising from the low interest rate environment June 2021.
Report by the Joint Task Force of ESRB Advisory Technical
Committee (ATC), ESRB Advisory Scientific Committee (ASC), and
ESCB Financial Stability Committee (FSC), June.

Fell, J., and T. Shakir (2021). May 2021 Financial Stability
Review. Presentation at SUERF-Baffi Bocconi Webinar, May 19,
2021.

OECD (2021), Brick by Brick: Building Better Housing Policies,
OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en.

Housing policy strategies –
what is best practice?
by Arent Skjæveland, Deputy Director of the Economic Policy
Department of Norway’s Ministry of Finance and Chairman of the
Working Party No. 1 of the OECD’s Economic Policy Committee.

https://www.oecd.org/housing/policy-toolkit/
The first phase of the horizontal housing project has been
completed, resulting in a new OECD Toolkit for housing policy
that can guide national reform efforts. The toolkit
complements the OECD housing policy strategy. The core
importance of the housing market both for welfare and
efficiency in our economies makes this toolkit highly relevant
and timely.

First, debt-driven housing market bubbles are at the root of
many financial crises and may imply harsh and very long-
lasting downturns. Let me take my own country as an example.
The financial crisis in Norway in the late 1800s, the so-
called Christiania crash (that was the name of the capital at
that time), left deep scars. Not only among ordinary people
who saw their fortunes evaporate, but also in the city’s
physical landscape. Large parts of today’s city centre in Oslo
were built during the housing market frenzy of the 1890s. When
the housing market collapsed in 1899, most building activity
came to a standstill that lasted for two decades, leaving the
architecture of the 1890s as one of the city’s distinctive
characteristics. It took 90-years for house prices, in real
terms, to recover most of their losses.

A new financial crisis was then approaching. The Norwegian
banking crisis in the late 1980s is one of the worst financial
crises in advanced economies in modern times according to
Carmen Reinhart and Kenneth Rogoff. Real house prices declined
by 40 percent and did not return to pre-crisis levels for more
than 12 years. The impact of the crisis was harsh, as the
number of unemployed tripled and the three largest banks in
the country collapsed.

In recent years, house prices have surged once again, fuelled
in part by low interest rates at home and abroad. However, we
really have a close eye on this. Much is done

     at the demand side with macroprudential regulations to
     contribute to more sustainable household debt
     at the supply side to reduce building cost.

Certainly, a lesson both from our crises-experiences and
similar crises in other countries is that the housing market
is at the core of financial stability and far too important to
be left at its own. Not only for financial stability, but also
for a range of other aspects of the welfare of the population.

To own the house you live in, is of great value to most

people. Owning a house often gives a sense of safety and
security. In Norway, 80 percent of households own the house
they live in. A high level of home ownership is a typical
pattern in most OECD countries, with an OECD average of about
68 percent. Housing is typically the largest asset in
household balance sheets, as well as one of the largest
spending items in household budgets. Housing market
developments are therefore of great influence for the
distribution of income and wealth. Housing is a fundamental
driver of the accumulation and the distribution of wealth and
debt within and across generations.

This has a strong link to housing affordability. House prices
across the OECD countries have raised to levels that may
undermine housing affordability, particularly for low-income
households, first-time buyers and in fast-growing urban areas.
Access to affordable housing is crucial for achieving a number
of key policy objectives, including poverty and homelessness
reduction, equality of opportunities and sustainable growth.
What policy avenues to follow to achieve housing affordability
are challenging. As an example: Tax subsidies to homeownership
often favours insiders, as house prices are pushed upwards,
making the step into the housing market for first-time buyers
even more difficult.

Housing is also important for productivity and the growth
potential of our economies. A main channel is via the impact
on the mobility of workers. The degree of geographical
mobility has strong implications for the functioning of the
labour market as it affects the job-matching process and use
of human resources. This is of crucial importance when labour
market developments between regions show an asymmetric
development. In this respect, high transaction taxes on houses
or difficult access to reasonably priced housing in other
regions can trap workers in unemployment or low-productivity
jobs, and workers can even end up falling out of the labour
market. Such obstacles to worker mobility may have strong

effects on economic efficiency.

Another aspect of housing development is how it may affect
environmental outcomes, including thorough interactions with
urban land-use patterns, residential energy consumption and
transport systems. Here there has been a complete change in
many countries over the last decades. One might say that car
use strongly influenced urban planning in the former
millennium. Currently, public transport, less parking, more
cycling, less cars in the city centres and better clustering
of living areas are more at the forefront. Net zero emissions
are the new keywords in urban planning and transport policy.

Building land is a scarce resource in urban areas, and it is a
strong tendency that big cities experience a stronger house
price growth than more rural areas. When working on national
house policy strategies, we have to address such differences
between pressure areas and areas with less pressure.

Taking all this together – a multi-facetted housing policy
strategy is needed. Such a strategy has to cut across many
policy areas, including financial regulation, taxation, carbon
footprint, urban land use regulation, transport policies,
local public finance, social housing, welfare support, housing
standards, rental regulation and the enforcement of
competition in related activities as construction and real
estate. To be successful making such national strategies, we
need to learn from the each other. What is best practice? The
new OECD Toolkit for housing policy and the OECD Housing
Policy Strategy give many of the relevant answers.

Further insights and policy implications can be found in the
new OECD report Brick by Brick: Building Better Housing
Policies. The accompanying online toolkit features
a Dashboard of indicators covering outcomes and policy
settings, Country Snapshots of the housing sector, and
a Policy Action Tool that allows policymakers to anticipate
synergies and trade-offs across various outcome dimensions

before implementing housing reforms.

How will rising shipping cost
affect inflation in OECD
countries?
by Sophie Guilloux-Nefussi     and     Elena   Rusticelli,   OECD
Economics Department

How will rising shipping cost affect inflation in OECD
countries?

Extraordinary demand and supply factors have pushed up freight
prices

Shipping cost rates have soared in recent months due to the
conjunction of booming demand for consumer durables from Asia
and supply-side bottlenecks created by sanitary restrictions
in ports and terminals. These have slowed loading and
unloading operations and crew changes. Prices of containerised
freight started to rise in the second half of 2020 and rose
further in the first quarter of 2021, when the average
quarterly increase across the main indices of global shipping
costs ranged between 30% and 65% (Figure 1).

Figure 1:   Container shipping prices are on the rise since
mid-2020

On the demand side, the pandemic led to a global demand drop
at the start of 2020, followed by a quick recovery at the end
of the same year. Pent-up demand caused by lockdowns in the
first half of 2020, shifts in consumption patterns towards
durable goods, and government income support all strengthened
demand for goods when transportation services were still
limited.

On the supply side, multiple factors are compounding shipping
delays. Vessels are currently used at almost full capacity and
containers remain scarce. Congestion at ports, and lower
productivity at terminals and inland depots have also led to
bottlenecks. Distancing rules and reinforced hygiene standards
have increased intervals between crew shifts. These have
prolonged processing times at ports, hampered the return of
containers to Asia and generated delays along the entire
shipping chain. The March blockage in the Suez Canal also
added to shipping disruption and tensions.

This atypical situation is expected to persist for a few more
months. Port congestion continues to be a big bottleneck in
the United States, where all loading/unloading slots for

cargoes from/to Asia are fully booked throughout the second
quarter of 2021. The reopening of European economies is also
impacting supply and demand. In this context, industry experts
do not foresee any normalisation of prices before the end of
2021.

Rising shipping costs could push up inflation temporarily in
OECD countries

To which extent will the observed rise in global shipping
costs impact inflation across OECD countries? The empirical
approach to answer this question proceeds in two steps: first,
quantifying the pass-through of shipping costs to merchandise
import price inflation, and, second, assessing the
transmission of import price inflation to consumer price
inflation.

In the baseline scenario, shipping costs are assumed to rise
by 50% in the first quarter of 2021 and to stabilise at the
same level for the rest of the year, in line with the recent
industry experts’ projections. However, the uncertainty around
forthcoming container freight rates remains high and,
therefore, two alternative scenarios are considered: one of
anticipated normalisation in which shipping costs gradually
decline to a price level slightly higher than prior to the
pandemic starting from the second half of 2021, and one of
delayed normalisation in which the initial rise is followed by
a further 10% increase in each of the three remaining quarters
of 2021.

Figure 2 – Effect of global shipping costs developments on
OECD merchandise import prices and consumer prices

In the first quarter, the observed rise in shipping costs is
estimated to boost merchandise import price inflation (year-
on-year) in OECD countries by 2.5 percentage points on
average. After four quarters, depending on the scenario, the
impact on merchandise import price inflation could still be
between 0.6 to 3.5 percentage points (Figure 2, Panel A).
Notwithstanding the swift reaction of import costs, the pass-
through to consumer price inflation would be modest. The
overall rise in CPI inflation would be by about 0.2 percentage
points after four quarters, with no major divergence across
the three scenarios (Figure 2, Panel B). Consumer price
inflation would start to recede gradually thereafter and
settle back over the following 2-year period, reflecting the
large inertia in price adjustments of consumption goods. Given
the relatively small portion of transport costs normally
incorporated in final goods value, this result is not

surprising2 and is in line with previous estimates available

for the US economy (based on a different methodology).3

Arguably, the rise in ocean shipping costs could compound with
other input costs pressures − due to global shortages in
specific industries like semiconductors − and rising commodity
prices to further push up inflation in the coming months.
However, these cost-push pressures are expected to be
temporary. Inflation expectations are well anchored and global
spare capacity remains sizeable. As a result, a significant
and sustained pick-up in underlying inflation is unlikely

beyond a few quarters and monetary authorities should look
through these transitory relative price shocks.

References:

ECB (2021), “What is driving the recent surge in shipping
costs?”, Economic Bulletin, Issue 3 / 2021 – Box 1.

Guilloux-Nefussi, S. and E. Rusticelli (forthcoming 2021),
“Recent developments in input costs on global markets and
their consequences on inflation in OECD countries”.

Herriford, T., E. Johnson, N. Sly, and A. Lee Smith (2016),
“How Does a Rise in International Shipping Costs Affect U.S.
Inflation?,” Macro Bulletin, Federal Reserve Bank of Kansas
City.

OECD (2021), “Rising container shipping costs could push up
near-term inflation in OECD countries”, OECD Economic Outlook
No 109 (Edition 2021/1), Chapter 1, Box 1.3.

The Netherlands: Building a
stronger recovery
By Daniela Glocker, OECD Economics Department

The Netherlands is recovering from its largest economic
contraction since the Second World War. Almost overnight, the
COVID-19     outbreak     restricted      people’s     daily
lives. Work and education shifted to take place from home.
Many businesses offering non-essential but close contact jobs
could not easily adjust, leading to a reduction in working

hours or number of employed. Travel, social interactions,
shopping, cultural and leisure activities were restricted to
hold back the spread of the virus. The Dutch government
swiftly implemented a comprehensive support package,
and extended and adjusted the measures several times in
response to prolonged restrictions. These policies reduced
uncertainty and protected people, businesses and jobs. In
combination with structural and institutional strengths and a
high level of digitalisation, the generous fiscal
support helped the country to weather the COVID-19 crisis with
limited economic damage compared to many OECD countries
(Figure 1).

Figure 1. The economy contracted less than elsewhere
Real GDP, Index Q4 2019=100

Note: The pre-crisis growth path is based on the November 2019
OECD Economic Outlook projection, with linear extrapolation
for 2022 based on trend growth in 2021.
Source: OECD Economic Outlook 106 and 109 databases.
The start of the vaccination campaign earlier this year marked
the beginning of the end of the health emergency. As the Dutch
roll up their sleeves, restrictions are progressively lifted,
business and consumer confidence are improving, and the
economy is set to recover gradually. The 2021
Economic Survey of the Netherlands foresees annual growth of
2.7% in 2021 and 3.7% in 2022, with GDP recovering the pre-
crisis level at the beginning of 2022. Private

consumption will drive the recovery as households can eat out,
shop and enjoy many of the social, cultural and leisure
possibilities that have been off-limits during the pandemic.
Nevertheless, private consumption will be held back by
households facing an increase in pension premiums and rising
unemployment as the result of support measures being phased
out. Uncertainties still abound. Quicker than expected vaccine
roll out can contribute to faster economic growth, especially
if returning confidence spurs people to spend some of the
savings amassed during the pandemic. On the other
hand, potential outbreaks of vaccine-resistant virus strains
could postpone the recovery. Well-targeted fiscal support
should remain in place in the short term to support the
recovery, but the government should also plan forward
and carefully weigh permanent spending increases against
pressures emerging from population ageing and related health
care expenditures.

The 2021 Economic Survey of the Netherlands argues that coming
out of the pandemic is an opportunity to build back stronger,
fairer and greener, by      addressing   some   long-standing
structural challenges:

     In the Netherlands, a high share of workers are on non-
     standard contracts. This trend has increased over recent
     years, driven largely by lower labour costs for the
     self-employed and other non-standard workers than for
     regular employed. During the crisis, self-employed and
     other flexible workers on freelance or on-call contracts
     were more likely to lose their job as the job retention
     scheme mainly protected workers on permanent
     contracts. Temporary contracts are also used
     more frequently in hospitality and service sectors,
     which were hit hard by the COVID-19 crisis, in lower
     skilled occupations and among young workers. Although
     the government provided some income support for the
     self-employed, the crisis may have exacerbated income

inequality. Implementing the Commission for the
Regulation of Work recommendations is key to reducing
labour market duality. More should also be done to
reduce the gap in part-time work between women and men.

People living in the Netherlands are exposed to the risk
of local air pollution and to climate change risks such
as floods, as large parts of the country are below sea
level. People’s exposure to nitrogen emissions
remains among the highest in the EU owing to high
population density, high industrial and agricultural
production and being home to Europe’s main
seaport. A High Court ruling in 2019 stipulated a re-
evaluation of permits for a range of nitrogen emitting
activities, notably for construction and agriculture
projects near natural preservation areas. The available
nitrogen space for new developments remains limited,
constraining new investment in infrastructure, buildings
and agriculture. Greenhouse gas emissions are also high
compared to the EU average, and a High Court ruling in
2019 mandated a 25% reduction compared to 1990 levels by
the end of 2020. This prompted a reduction in coal power
capacity and other measures. The 2020 target was just
met, owing in part to the COVID-19 crisis that reduced
economic activity and mobility. Long-run prosperity and
people’s well-being hinge on the reduction of local air
pollution and greenhouse gas emissions, which
requires concrete national-level actions, as well as
enhanced regional and international cooperation.
High debt and a high share of illiquid assets, mainly
housing, held by households create macroeconomic and
financial vulnerabilities. Household debt is at more
than 200% of disposable income, among the highest in the
OECD, mainly consisting of mortgages. Limited housing
supply and favourable tax treatment for owner-occupied
housing have contributed to soaring house prices. As a
result, home-owners are not only better off compared to

people not yet owning a house, i.e. often the young and
     people on non-standard work contracts, due to higher
     equity, but also compared to investors of other
     assets. A possible future correction in house prices is
     a risk to economic growth, as households who suffer
     large capital losses tend to cut back on consumption in
     order to continue servicing their debt. A more balanced
     housing market with affordable prices and a better
     functioning rental market would not only reduce
     inequality and macroeconomic risks but also boost
     growth.    A   coherent    package    of   reforms    is
     needed, including to the tax treatment of owner-occupied
     housing, spatial planning and rental regulations.

As the Netherlands re-emerges from the shadows of the
pandemic, and people and businesses are weaned off emergency
support, it is not the time to return to the old ways. It is
the time to build a new future. A future that is better.

Better Housing For All: How
to Square the Circle
by Volker Zieman, OECD Economics Department

https://www.oecd.org/housing/policy-toolkit/

Housing is one of the most complex policy challenges of our
time. There is, of course, the affordability issue and how to
cope with the concentration of demand in supply-constrained
areas. Yet, the functioning of housing markets also reflects
other burning challenges of our lifetimes, including social
cohesion,    financial     resilience,     residential     and
intergenerational mobility or the ecological transition.
Against this background, the OECD has launched a Housing
Policy Toolkit to help policymakers address these intertwined
challenges. The overarching theme is assessing the performance
of housing markets across three main policy objectives: social
inclusiveness, economic efficiency and environmental
sustainability.

Figure 1. Housing affects society and the economy in multiple
ways

Making housing more inclusive

Access to affordable housing – a basic human need and central
driver of well-being – has become increasingly challenging for
many households in OECD countries. Housing-related spending
absorbs on average about one-third of household budgets, a

share that has been rising over time. Over the past two
decades, prices have risen by 60% more for homes than for
goods and services on average across OECD countries. Low
interest rates have helped households absorb part, but not
all, of these higher prices. Seven of the 23 OECD countries
for which the data are available have experienced real house
prices in excess of 90%. Moreover, increasingly steep house
prices gradients in urban areas make housing close to economic
and cultural amenities unaffordable for most families. The
resulting spatial segregation by income threatens social
cohesion and undermines economic and ecological efficiency.

Making housing more efficient

The affordability challenge very much reflects the housing
sector’s failure to raise supply where demand is strong,
particularly in jobs-rich urban areas, which drives up house
prices and rents. This is due to geographical constraints but
also regulatory restrictions in many cities, including land-
use and zoning provisions. In some cases, regulations on
tenant-landlord relations, introduced to alleviate the near-
term burden of housing costs mainly for incumbent tenants, can
discourage the supply of rental dwellings or push up rents,
thereby undermining affordability over time. Moreover, housing
has often been at the core of financial crises, but there is
room for policy, especially prudential regulations, to smooth
house price fluctuations and make the economy more resilient
to housing shocks.

Making housing more sustainable

The transition to a carbon-neutral, clean economy poses a
formidable challenge for a sector that accounts for 17% of
global CO2 emissions and 37% of global fine particulate matter
emissions. Progress in this area calls for lowering the carbon
footprint of new constructions and improving the energy
efficiency of the existing building stock. Almost two-thirds
of countries worldwide still lack mandatory building energy

codes. Frontloading efforts is critical as dwellings have a
very long lifespan. Besides, energy poverty tends to compound
the affordability challenge, as nearly 20% of low-income
people in the OECD area experience difficulties heating their
homes.

Addressing challenges through concerted policy action

Some policies can deliver progress across multiple objectives.
This is the case, for example, of increasing government
investment in social housing, alleviating restrictive
regulations on land use and shifting housing taxation towards
recurrent levies on immovable property. Other reforms may
involve trade-offs, calling for compensatory measures to
ensure balanced progress. For instance, more flexible
regulations on landlord-tenant relations, including rent
control, can encourage housing investment, reduce supply-
demand mismatches and lower barriers to residential mobility,
but they could also penalise vulnerable incumbent tenants.
Similar intertemporal trade-offs apply to relief measures
taken during the COVID-19 crisis.

Further insights and policy implications can be found in the
new OECD report Brick by Brick: Building Better Housing
Policies. The accompanying online toolkit features a Dashboard
of indicators covering outcomes and policy settings, Country
Snapshots of the housing sector, and a Policy Action Tool that
allows policymakers to anticipate synergies and trade-offs
across various outcome dimensions before implementing housing
reforms.