Is it Europe’s turn to rise a housing bubble?
Both Morgan Stanley (at least Eric Chaney) and JP Morgan (in their latest global outlook) now recognize that Europe has emerged as an important engine of global demand growth. Indeed, the 2005 surge in European demand seems to be reasonably well correlated with the surge in US pessimism about Europe. Europe, the story went, couldn’t generate the political consensus to make the necessary labor and product market reforms, so it wouldn’t be able to support global demand.
What did that story leave out? Low European interest rates and the housing market. I have often argued that Europe (France included) looks a lot more like the US than most folks realize. Job growth hasn’t been all that impressive on either side of the Atlantic. Indeed, by some measures, it has been better in old Europe. Real compensation growth hasn’t been all that impressive on either side of the Atlantic.
And in both regions, frothy housing prices have supported consumption growth.
Today, I am turning the blog over to Charles Gottlieb of the European Capital Market Institute and the Center for European Policy Studies. He is writing in his own personal capacity – the usual disclaimers apply with force.
His topic: the European housing boom (or bubble) – a topic he also wrote about in the Spring for the ECMI. There is a lot of interesting material — and a few nice graphs – below the fold. Enjoy.
Charles Gottlieb:
The US housing bubble is about to burst, which is likely to curb US growth. For the first time since 1994, the median selling price for US homes is not increasing (see The Economist August 24, 2006).
It seems though (see Setser,) that the EU has taken over from the US as the key driver of global demand growth. Interestingly one of the determinants of current EU dynamism —the evolution of European housing prices —should be familiar to Americans. Daniel Gros rightly points out that EU House price cycle lags the US by one or two years (see Daniel Gros paper, February 2006). The EU therefore may support global growth over the next two years, before it gets into a similar situation to that of the US.
In fact, European house prices seem to be far removed from their fundamental value. Indeed housing prices are highly persistent (upward and stable trend) and revert to mean less strongly than other asset markets (due to inelastic supply), yet, according to OECD data, since 1996 some housing markets have taken off at a rapid path and are currently reaching unprecedented levels. The heterogeneity of patterns in housing prices evolution is striking, and four countries have taken more than expansionary paths…
According to the data, the French housing market looks a lot like the American housing market. In both France and the US, home prices have undergone similar evolution and are currently both well above long-term trends. Spain, UK and Ireland have experienced an even more robust increase in housing prices. Since 1997 the Spanish and UK house prices indices have more than doubled, and Irish prices have more than tripled. Spanish and British housing prices are about twice their 20-year average.
Chart1: The EU housing market on the take off
Source : OECD
In the housing market, demand – not supply – determines price dynamics, at least in the short-run. The supply of housing is fixed in the short-run, only adjusting over the medium to long run.
On the demand side, housing is closely tied to the evolution of household income, financial markets and population growth. Countries that greatly benefited from the European integration (Spain and Ireland) and whose household income grew at a rapid pace, have experienced surging house prices (see Chart1).
Secondly, credit markets in Europe are increasingly competitive, and credit standards have been continuously eased over the past years (see ECB report). Declining mortgage rates have supported housing demand over the recent period of house price dynamism. Finally, recent lenient lending policies in France and Spain rendered mortgage funding attractive further fuelling housing demand. Despite high house ownership ratios, households still have strong financial incentives to further invest in housing, particularly after an equity bust (look at house price growth after 2000…).
Thirdly, migration flows contribute greatly to housing demand. In countries such as Spain, France, United Kingdom and Ireland, immigration has rejuvenated the domestic age structure. This implies a higher mortgage demand, and a rational decision (according to the life-cycle hypothesis) to take up more debt.
Supply-side limits have further supported the price surges. Particularly in Europe buildings restrictions are particularly strong (The Economist). The Impact of zoning on housing affordability further inhibits supply-side adjustments, and drives prices up.
Yet supply constraints haven’t been the determining factor in many markets. Residential investment is probably the best indicator to foresee supply-side adjustments on the housing markets. The surge in Spanish and Irish housing prices does not reflect a lack of new supply – far from it. Residential investment has increased dramatically as a share of Spanish and Irish GDP.
Chart2: Housing investment in Europe
In France and the United Kingdom, by contrast, housing supply seems to be stuck. Such rigidities are probably due to labour market inflexibility (in France, which may need more Polish brick-layers) or to the above mentioned zoning rules, which hinders the ability of the housing sector to satisfy expanding demand.
Germany may be experiencing a hang-over from a post reunification surge in residential investment – hardly a comforting signal. However, it now seems that the German market is starting to wake up.
The house-ownership ratio can be considered as a good proxy for the sustainability of house price evolution and the growth potential of the market. Given that every household strives for a dwelling, low house-ownership ratio would justify a great potential demand for housing and thus strong mortgage-funded housing demand.
|
Country |
Share of ownership dwellings |
|
Spain |
85 |
|
Greece |
80 |
|
Ireland |
78 |
|
Belgium |
72 |
|
Italy |
69 |
|
Luxembourg |
67 |
|
UK |
68 |
|
Portugal |
64 |
|
Finland |
64 |
|
Denmark |
59 |
|
France |
58 |
|
Austria |
56 |
|
Netherlands |
53 |
|
Sweden |
53 |
|
Germany |
39 |
Source: ECB
The above evidence supports the house price surge in France, and to a slighter extent for the UK. On the contrary, the strong share of ownership dwellings in Spain and Ireland emphasizes the irrational exuberance in those housing markets.
The above exposition of the demand and supply factors crystallizes a so-called centre-periphery dilemma in Europe. On the one hand, the converging periphery, namely Spain and Ireland, exhibit booming housing markets in which supply is adjusting. And on the other hand, in Europe’s core, France, the UK, and Italy to a certain extent, a demand-led boom hasn’t triggered supply adjustments. In France, UK and to a lesser extent Italy (again) strive to offer a dwelling for each household, but face bottlenecks on the supply-side and most probably very stark regional disparities.
Spain and Ireland have the highest share of ownership dwellings ratio and strongest supply-side adjustments. Their housing boom can not be explained by a housing shortage. But it could potentially be due to some sort of Balassa-Samuelson effect on the housing markets. Houses are non-tradables; their prices increase more rapidly than those of tradable products. Thus, the current explosion of house prices in Spain could have a “Balassa-Samuelson component” —something that I hope to examine at a later date.
How does this relate to recent European demand growth? Simple. Surges in housing prices foster consumer optimism, and stimulate consumption. And rising housing prices rising residential investment and buoyant consumption demand push up overall investment by firms. High domestic demand in turn triggers an import boom. As chart 3 underlines, the correlation between house prices and domestic demand is strong in most European countries (high R2). European households are spending "à l'américaine" – spending not just some of their current capital gains, but some of their expected future gains (anticipated wealth effect).
Chart 3: Housing prices and Domestic demand
Simultaneously, Spain has experienced a worrying deterioration of its current account since 2003. Indeed, (see FT) Spain’s current account deficit reached a whopping 7.6% of GDP (Q1 2006), topping that of the US. While absolute values at stake are not the same, both the US and the Spanish imbalances stem from similar economic distortions/misallocations are at their root, and they both need to be addressed. Yet Spain’s situation is rather worrying as export dynamism (as a share of GDP) has dampened out and imports have surged. At least the US’ exports share in GDP reignited with growth in 2004.
The UK’s current account is also negative, but export dynamism remains contrarily to Spain where the share of exports in GDP has continuously plunged since 2000. In France, the situation is less cumbersome too. The current account deterioration is considerably weaker, as exports are growing at a reasonable pace. Nevertheless, the current account turned negative for the first time since 1991, suggesting that the house price surge and the abundance of consumer-friendly mortgage programmes has fuelled internal demand.
Overall housing prices have arguably strongly revived the European consumer’s wealth perception, and strengthened their confidence. Internal demand revamped European growth which was revised upwards by the bureaucracy in Brussels: Euro Area growth is to be the best since 2000, achieving 2.5% yoy.
The bottom line: Europe has taken the housing relay baton from the US, but in this race, the baton is perhaps better described as a bubble.
Charles: Great stuff.
Loved your last graph. It seems that the US is somewhat more efficient than Europe at converting housing price rises into domestic demand. Hope that relationship only holds on the way up!
This is a comprehensive, thoughtful post. Some points:
(a) As a glass half empty sort of guy, I am very wary of the term “key driver of global demand growth,” which I consider as a euphemism for “spending beyond one’s means”! The alleged McDonaldization of Europe does not bother me so much as picking up unsustainable spending habits. The EU current deficit will help tell the tale going forward.
(b) Didn’t some European housing markets–like the UK–precede the US into Bubblelandia instead of the other way around?
(c) Countries like Spain, Ireland, and France are just wonderful places to live regardless of where you come from. Therefore, it might be informative to see the extent to which demand has been driven by foreign buyers.
Hi Brad,
Although this may sound like a sterotype, the Europeans that I have met are more sober minded about the role of finance and speculation in the economy. In particular, the Germans are adamant about “sound money” monetary policies especially considering their historical disaster with hyperinflation that led the path to the Nazi regime in the 1930’s. Unlike their yuppie American counterparts on CNBC promoting the latest Asset bubble craze, the Germans don’t speculate in Dot-con stocks or buy McMansion houses for short-term financial profit. The Germans do build stuff like industry and infrastructure.
By contrast, the Bernanke Federal Reserve monetary policy continues to promote excessive printing press Credit (ie. purchasing power). The resultant abundant financial flows are directed to securities and asset markets with attendant Financial and Economic Spheres maladjustment. Meanwhile, the most prominent Inflationary Manifestation, the U.S. Trade Deficit, swells to only more ridiculous dimensions. These Monetary Processes and resulting Monetary Disorders are only reinforced by Bernanke’s irresponsible abhorrence of popping Asset Bubbles.
Regards,
Speaking from my experience (im irish home owner)
ireland has experienced a property boom over the last decade (at least 20% per annum growth in price), which does coninside with the celtic tiger period (94 onwards).
however what has also happened (as a result of or in conjuntion with ive no idea)
1. massive uptake in employment by women. (increasing affordability)
2. immigration, both returning irish (wealthy) and non irish (not so wealthy). (increasing demand side)
3. euro entry and lowered interest rates as result of. (increasing affordability)
certainly supply is not a factor, i think arround 80,000 new builds in 2005 (about 25% UK total i think)
their are few foriegn buyers in Irish market, theres just no value to be had, doesnt stop irish from getting 2nd home tho (or investment property, tho rental market is a negative return game now, its the capital appreciation man!)
from the view point of house price alone things do look strange. but from the viewpoint of affordability its not. its definately cheaper for me to get my house now than it was for my parents to get their house back then.
also we irish have cultural thing of owning our own house. no need for history lesson to explain why, just take my word for it.
btw Gr8 blog Brad. quality stuff.
Emmanuel - thanks for the interesting comments.
a- You are right about the fact the Europe is not spending beyond its means - savings rate are indeed very confortable, however since 2002 the EU current account is downward sloping and currently at 1% of GDP… nothing to worry about but the correlation between House prices and national current account deficits is there (see daniel gros paper)
b- Well, for the UK, as you can see on the first graph, OECD data hints towards a price reduction. But other sources still see a 3% increase of house prices over the last quarter and 7% over the past year… (see http://www.nationwide.co.uk) thus it seems that UK prices are like other EU countries prices still on the rise.
c- Indeed those countries are great place to retire, and demand is driven by foreigner in Spain and France, without any doubts - for Ireland I have my doubts and really think it is driven by the strong GDP/capita growth. I intend to adress this issue, especially by gathering regional data, but as you can imagine it is rather cumbersome work and needs time. Soon more on that.
Oscar’s comments reminded me of this:
“…The Irish are estimated to be in the top three foreign investor nations in Berlin. However, in a city of 3.4 million, where only half of its citizens are working… Morris brushes aside the cautious noises of German observers and says: ‘The prospects for Berlin look good in the long run. Many of the Germans in business here are too conservative. ‘There are good deals to be had here in Berlin and the long-term returns will be worth it. We might take a look at Dresden too.’…” http://observer.guardian.co.uk/world/story/0,,1863849,00.html
Perhaps one of the reasons German property markets overall have stagnated, despite the fact that München, Berlin and Frankfurt rank among the most expensive cities in the world, yes?, may be that if relatively few Germans ‘own’ their homes, and if many Germans are in a soft job market without the benefit of the accumulated wealth associated with homeownership, they may not be able to afford property purchase opportunities which may be available to them. Creating opportunities for the Irish - and other property rich, property market savvy, ‘foreign’ investors.
From that observer link:
“‘The €35m deal we are trying to secure now would land us with 900 apartments, 30 per cent of which need renovation. What we are offering in all our properties is a net return per annum of 7 per cent from rental incomes,’ he says.”
A net return of 7% on rental income, you don’t see in a lot of other OECD countries right now.
Employment in the German construction industry declined by about 50% since the unification boom. I hope that’s not what happens to the US, UK, and all the other countries with a housing bubble.
re: “Employment in the German construction industry declined by about 50% since the unification boom. I hope that’s not what happens to the US, UK, and all the other countries with a housing bubble.”
Difference being, if the numbers indicate that those US and UK construction workers are more likely to own property, and if they have arranged things in a manner that enables them to ride out the dip (surely they would have been among the first to see the alleged ‘crash’ coming), shouldn’t they also be among those who are better able to position themselves in a way that allows them not only to ride it out, but perhaps to profit from it by recognizing and picking up some bargains along the way?
Charlie, thank you for this, and Brad, thanks for your whole series of posts on Europe, which have really wiped away a lot of cobwebby stereotypes and changed the tone of the debate.
Reading this post, and many of Brad’s recent posts on Europe, I find myself thinking again about the original Bretton Woods II papers. I recall that Dooley, Folkerts-Landau, and Garber argued that while the “periphery” might migrate over time (Africa, anyone?), the “center” would always be the United States, owing to the dollar’s reserve currency status, and the American economy’s unique openness to world markets and to change.
But, Brad has argued persuasively that it is Europe, not America, that is now driving Asian export growth. Here we see more evidence that an American-style asset economy can indeed spur European demand-driven growth. The political forces that lay behind America’s openness throughout the BW II era — large firms benefiting from supply chain arbitrage, popular hypermarkets, politically connected assetholders — are all present in Europe as well. The BOP accounts of many European countries, and the continent as a whole, are slowly shifting into deficit. Perhaps what Brad and now Charlie have been describing is a transition to “Bretton Woods III”, with Europe as its center.
Of course, one might object that the signature fact of a “Bretton Woods” regime is absent, namely fixed exchange rates. Asian currencies do move against the Euro. But the BWII dynamic does not really depend upon fixed rates, but on resisting appreciation in the service of export-led growth. So long as the dollar trades in a narrow range against the Euro, or better yet has a tendency to depreciate, pegging to the dollar as a proxy has the great virtue of a non-event: It avoids difficult questions. Only if the dollar should show sustained strength against the Euro would the flexibility inherent in an undisclosed, adjustable “basket peg” need to be exercised.
Maybe a BWII-style Europe-as-asset-driven-demand-driver, Asia-as-surplus-running-super-supplier is what commentators really mean when they talk about “decoupling” from an American slowdown. Interestingly, in this next brave world, the new “center” would have the benefit of foresight. Europeans need only gaze across the ocean to learn what happens when the periphery finds that the center has become, well, peripheral.
One more thought about the Germans and property markets - may be an interesting case? It’s my impression that Germans are among one of the top - 10? - foreign investors in North American - and global? - property markets. If we also had some idea of how many ‘Germans’, which I assume would be defined by a citizenship and a passport, who own property abroad are among those who also own property in Germany, perhaps along with comparable information about other significant foreign property investors - if we can learn something from that. What are people’s motives for buying property abroad and might they have very different attitudes towards valuations and means of financing their purchases in a global market.
Steve — yep, the Emerging market plus Japanese current account surplus is now so large that it finances Europe as well as the US … and one plausible future (in the near term) is that the US current account deficit doesn’t widen, but europe’s does — allowing emerging economies to continue with their current growth model (premised on very strong export growth and expanding current account surpluses).
By contrast, the Bernanke Federal Reserve monetary policy continues to promote excessive printing press Credit
False Bernanke has not used the printing press. The ratio of central bank money relative to credit based money is lower in the USA than in europe.
All countries now need more central bank money to off set the credit crunch ahead, not less printing press, more. That s what we need to fight deflation.
Notice commodities are down finally. Crash ahead.
“I have often argued that Europe (France included) looks a lot more like the US than most folks realize.”
amen
plentiful post indeed
Excellent post. Much has been written about this topic focusing in those factors that drove this bubble. Affordability? To me to have to work all your life (considering the high prices attained so the necessity to obtain a 30′year mortgage loan), tells you that the real owner is the bank. Has anyone thought that nowadays thanks to globalization nobody has a stable job in his workabale life. Sooner or later the borrowers won`t be able to service the amortization and the banks will pile up past due loans.
On the topic of global real estate markets:
“…The huge interest of investors in this and other well-to-do areas is typical of the unprecedented surge in real estate businesses in big cities like Lahore and Karachi following the attack on the World Trade Centre. Since then, the value of one plot in the Defence Housing Authority has shot up from about $65,000 before 11 September to in excess of $1.5m after it… The boom has led to a mushrooming of Pakistan’s middle class housing suburbs… “The price of the real estate went up by as much as 1,000% in the city in the last five years.” The rocketing real estate prices in Lahore have resulted in hundreds of rags-to-riches stories. Poor farmers with small pieces of land in the villages close to the municipal limits could hardly make ends meet. But with the fast expansion of the city’s frontiers, they sold off their property, pocketing millions of rupees overnight.
…All this is all the more amazing when one considers that just five years ago, Pakistan was on the verge of bankruptcy, with only a little more than $1bn in foreign exchange reserves and its stock market teetering at 1,000 points. Two months after 9/11, the forex reserves went up to $4bn as Pakistan joined the US coalition against the “war on terror”. The forex reserves now stand at more than $12bn. And there is little doubt that the catalyst for this growth has been the massive amount of remittances sent back by non-resident Pakistanis in the US and later from Europe… Strange then that the vast majority still have few kind words for the US - even though it is arguably the source of their new-found prosperity.” http://news.bbc.co.uk/2/hi/south_asia/5338402.stm
re: “Notice commodities are down finally. Crash ahead.”
And if commodities rebound, might your view be that a ‘crash’ has been averted?
“Crude oil futures on Thursday bounced off their six-month lows reached in the previous session, rallying on concerns about the impact on supply growth from delays at BP’s Thunder Horse facility in the Gulf of Mexico…” http://www.ft.com/cms/s/57edd33a-4959-11db-84da-0000779e2340.html
“…Mr El-Erian, who became president of Harvard Management Company earlier this year, said he has also boosted the fund’s exposure to “real assets”, including increasing the allocation of commodities from 13 to 16 per cent. “We’re tweaking the neutral asset allocation mix to reflect recent and anticipated changes in global economic conditions,” he said in an interview…” http://www.ft.com/cms/s/29a5704c-47ff-11db-a42e-0000779e2340.html
I wonder about the effect of tax policy, or in other words is the following a Finnish curiosity or something common in rest of Europe?
Right now, if I walk in a bank, I can get a variable rate mortage at about 3,75%. Inflation is about 1,9%, so real interest rate is about 1,85%. But 28% of my mortage interest payments are tax deductible, which is worth about half that in pocket, so my real mortage interest rate is 3,75% - 1,9% - (3,75%*28%*50%) = ~1,3%. Rates used to be as low as 2,5% before ECB started raising rates which actually meant negative real interest rates for most people. Guess which way the housing prices have gone over here. And fixed rates are quite uncommon here.
Thinking about the main draws for the - massive? - influx of foreign money into Britain’s property markets, and its broader impact on Britain’s economy.
To bounce back on steve and brad’s comment - I had a look at the current account in EU 12 and US, the trend is very similar apart that EU 12 managed a strong current account surplus over the nineties. However since 2001 both current accounts face similar trends with US leading EU by a couple of years… further credibilizing the eventuality that the EU current account is to widden.
More on foreigners pulling france and spain house prices in today’s FT: again the “anglais” pulling France’s house prices.
http://www.ft.com/cms/s/66ec883c-490d-11db-a996-0000779e2340.html
About my analysis of the house ownership ratio - I use it as a proxy in order to look at potential growth in housing demand. Sure france has a tradition of rental, but I don’t think this is a demand led development, but rather due to supply factors, i.e. few own many houses. As emphasized recently in Le Monde and the INSEE is the existence a supply-demand mismatch, i.e. more and more luxury dwellings available, although the demand is more on the bottom scale, social housings.
Charles — eurozone current account didn’t really turn down til 04/05, me thinks (EU-12 may be driven by UK?). Why? My bet is the weak euro of 01/02 had a role. Strong euro + renenwed growth = strong deterioration … with the housing market providing the shift in S-I that goes with the change in X-M. Very much like the US!
this passage is very shakey:
“Their housing boom can not be explained by a housing shortage. But it could potentially be due to some sort of Balassa-Samuelson effect on the housing markets. Houses are non-tradables; their prices increase more rapidly than those of tradable products. Thus, the current explosion of house prices in Spain could have a “Balassa-Samuelson component” —something that I hope to examine at a later date.”
not all non tradeables are subject to the B-S effect
B-S might explain 100% of a secular rise in
relative construction site labor
but real estate bubbles are not balassa made
you need to deductchange in the cost of housing construction
from materials develpoment soft cost and …lot value
bubbles as bubbles
are lot price made
real costs never burst
only imputed values like location
can absorb speculation fast enough
and unreal enough
bigger fool spiraling
can hit short run lot prices
if the credit availibility is there to fuel it
lots can spiral like dutch tulips
or elvis plates
Again, as far as I know, there is nearly no way french buyers can extract equity from their house in France, there are no or little of USA-style ARM
Ownership is low because “HLM” (low-rent social housing monitored by state, about 40% of renters in France are renting an HLM, 20-25% of the housing market) programmes that do not exist in the USA (and in most of Europe).
I agree that the French and USA economies are really close in many aspects and ratios, but not in the housing area.
Laurent you missed the latest law passed under sarkozy zhen he was finance minister. He made it possible for people who have lots equity in their home to get new mortgages in precisely the US way.
US and France are close in the housing area in the fact that in both places prices have been in bubble mode since 2002. Of course there are HUGE differences and households on the whole are less exposed in France than in the USA (less debt, more employment security (so far), more traditional loans) but they are increasingly exposed just as in the USA.
I think that the law passed by sarkozy at the height of the bubble is sheer proof of his economic irrelevance, just as the talks about removing the wealth taxation are completely stupid. The best thing in France was this taxation on wealth it could have forced many owners to sell their houses and thus curbed price down sooner. Now they want to remove it and postpone adjustment in order to make it more painful… Gee.
Since at least 1998 it has become self evident that globalisation and deregulation have gone too far. So globally the world has lost 8 precious years not tackling imbalances not reregulating all industries and especially the financial one, privatising crucial sectors, investing into far away countries instead of relocalising etc.
8 years lost that will cost a lot to all those who made the wrong assumption that globalisation will go on forever that financial markets are close to perfect and that you can trust a neoclassical economist.
To add to Oscar’s comment above, Ireland has a youngish population and had huge deferred demand: a lot of people were, and are, living with parents until they can afford to buy, which I suspect skews the ownership statistics. Supply is still an issue here, especially with the massive immigration. Immigrants are getting established here now and beginning to buy houses.
What measure is that housing index? Is it likely to be skewed by extreme values being paid for high-end properties?
“Plots of green belt land in England are being sold to Indians for thousands of pounds as one of the best ways to make money. They are being marketed on the basis that vast tracts of the English countryside would soon be covered in homes - and potentially make big profits for foreign investors… In India, landbanking firms are largely unregulated, although some have been closed down. In London, the Financial Services Authority is concerned some schemes should be controlled because they are “collective investments”. None of this has deterred Indians, who have increasingly large amounts of disposable income thanks to the country’s economic boom. They are told that the UK needs to build another 200,000 homes in the south east by 2016 to alleviate an impending housing crisis and some will have to be on green belt land…” http://www.guardian.co.uk/india/story/0,,1878515,00.html
I wonder what does Roubini think about all this. Wasn’t Europe ‘decoupling’ a fairy tale? http://www.rgemonitor.com/blog/roubini/139556
Moreover, interest rates are going up in Europe, and the more we grow, the more they will go up.
Plus, the story about Spain’s boom being due to household income is blatantly weak. What we have is:
- a very ownership-inclined population
- demographics: 1975 baby boom reaching their 25-30s plus massive immigration
- a national inclination to live on borrowed money and to believe in free lunches
- higher inflation than in the Eurozone which makes real interest rates MORE NEGATIVE than elsewhere
- speculative investment from the British, which see us like a retirement Florida with a universal healthcare system far better than the British one.
- we’re in Europe since 1986, which was 20 years ago. As of lately, European industry is moving to the cheaper Eastern Europe, because we are too expensive.
DF, I mentionned Sarkozy law on this forum a few posts ago, but AFAIK banks do not offer products based on these possibilities, so this has strictly zero impact to the discussion at hand. In France, banks must know their client by law: if they have lent money to people with payments above 33% of income, the bank will loose before the judges, so they don’t do that. Again, extreme differences with the USA environment.
Anyway, I feel we won’t have to wait for long before seeing how things turn out in France and in the USA.
Gcs - About the balassa samuelson effect - I don’t mean that it causes a bubble but a price boom, due to real convergence (i.e. Spanish House prices should grow quicklier than german one’s). On the supply side wages imply higher production/replacement cost and the demand side high growth rates trickle down to the average man’s pocket which strives for first/second property. Consequently house prices boom…
Colman - OECD House prices are based on national sources. These data are not strictly comparable across countries due to differences in definition, i.e. in some countries the index relates to prices of existing and/or new housing, to prices of houses for owner occupation only or also to prices of second residences.
charles :
i sympathize with your data problems
rule of official data
if its useful only in comparison to other official data
collected by another bureaucracy
its not comparable
as to the substance
i tend to agree there might be a relative wage lift
in spanish construction during this spec lot boom
a raise that might lock in higher building costs
but…beware the polish plumbers are coming
maybe they’re headed west by south west
I have some good friends in India who have been making 80% a year for last 5 years speculating in real estate. Last year we discussed looking together at properties in Vilnius in Eastern Europe, which looked set to appreciate rapidly; but my Indian friends’ deals were fast and furious in Chennai and around there, and we dropped idea. Action in one market affected action in another.
Here’s a general question about potential financial links between property bubbles:
Are European mortgages bundled and sold off as mortgage backed securities, as they are in the US? A related question is: If so, are the buyers of MBS the same for US mortgages and European mortgages? Final related question: If so, would defaults and devaluation of MBS that originate in the US hurt or drag down real estate markets in Europe?
It’s too bad that hard earned surpluses in Emerging Markets are recycled into rich country housing, but are they also buying the risk of the bubbly housing markets with their cash? Or are surpluses only financing US debt and European debt of other kinds?
The FX markets will provide the playing field for competing countries with similar levels of inflation and interest rates. The pyramid housing scheme, which benefited from excessive deregulation, will eventually topple in response to rising FX volatility.
Countries such as the UK are highly sensitive to any increase in interest rates. As the world’s natural disinflationary cycle ends, a small rise in interest rates will spoil the economy and cause GBP to decline (due to worries about the housing market) … which in turm places further pressure on the BOE to scupper growth in favour of curbing future inflation.
The British economy is now highly sensitive to the success of the housing market.
Low savings today will lead to reduced investment levels. So enjoy today’s easy gains for whilst house price growth may be good for consumer spending it will soon negatively curtain future investment and stagnate long term GDP growth.
http://macrocynic.blogspot.com
“housing prices are highly persistent (upward and stable trend) and revert to mean less strongly than other asset markets (due to inelastic supply)”
Spain -25% -30% -20% …..??
GB -27% -12% -27%….??
Finland -45%-45%….???
Italy -42%-38%
Ireland -20%…???
Denmark -47%-47%….????
Is that weak reverson to mean???
Questions : Chart 1
How are the indices composed: mean price average price? real prices?
“In the housing market, demand - not supply - determines price dynamics, at least in the short-run. The supply of housing is fixed in the short-run, only adjusting over the medium to long run. ”
From Chart 1 we conclude that there have been at least two correlated European supply crunches 1972-1975 , 1986-1992 and overhangs 1975-1978 1991-1997., with a smaller ones 1977-1981 1981-1983
The latest “crunch”started in 1997 occurred.
This means that to retain explanatory value, causal changes in household income, population growth, migration and or supply side conditions should be observable. Are they?
“Surges in housing prices foster consumer optimism, and stimulate consumption. And rising housing prices rising residential investment and buoyant consumption demand push up overall investment by firms. High domestic demand in turn triggers an import boom.”
Could consumer optimism not have been fostered by the happy music played on European radio stations during these periods? Is rising “overall investment by firms”correlated with the the house price developments detailed? What are the causal links?
What are the benefits and costs of the housing boom bust cycles? The BIS website http://www.bis.org has some several papers laying out the economic costs of Asset bubbles and of related bank failures to economies.
Gcs - The OECD database is a comprehensive database of indicators on housing prices. They are not strictly comparable, but are meant to give insights on where house price are heading, and how sustainable their evolution is. Moreover all data in the OECD database are collected by national “bureaucracy” (i.e. statistics institutes, national banks or the bis).
Old Vet - I came across interesting securitisation data this morning. The biggest surge in securitisation (relative to GDP) in European countries occurred in countries that had booming house prices (Spain, Portugal, UK, Netherlands, Ireland, and Italy). Interestingly, France is not in the lot, this is imputable to the strong developments of nil-interest rate loan sponsored by the governments which might evict the demand for more modern financial tools that rely on securitisation. Overall, this suggests that European mortgages are bundled as it is the case in the US.
As to the buyers of MBS/ABS, I don’t have data on the demand of ABS/MBS. A priori, those financial products are standardized so I don’t see any reason for the buyers to distinguish by the origin of the mortgages.
Known guest - Mean reversions are indeed strong, but a lot smoother than on other asset markets; it takes approx 5y for a real market price to stop slowing, although equity bubble burst take 2-3y (tech bubble), black Thursday even less. The mean reversion will be increasingly strong the more the credit side of household balance sheets is driven by market factors (variable/fixed rate, securitised mortgages …). Precisely this is the greatest concern for the UK and the US economy; if their housing market bursts, the consequences will trickle down onto the household balance sheets very rapidly.
Overall, the real trend is clearly upward sloping, despite the fact that housing construction “technology” evolves less rapidly than for most other goods (chart 1 is real data).
The strong mean reversion is explainable by the fact that supply is inelastic in the short run although demand depends on real wage growth, demographics, evolving cultural patterns. As soon as supply adjusts, there should be a mean reversion. This makes me believe that real convergence, credit development in Spain and the lowness of interest rates have catapulted the house prices of Europe’s periphery to a higher level. Henceforth, the potential mean reversion for those periphery countries might in fact not be as strong as the image conferred by the trend of their housing prices, but they will have to revert sooner or later, as current evolutions are unsustainable (according to their current level compared to 20or30 year average).
Data on Chart1: Nominal price deflated by the overall consumer price index, indexed 2000=100 for comparability matters.
Regarding the investment-housing correlation, I have computed residential investment as a share of GDP and housing prices, and it delivers a nice scatter plot, with relatively high R2. I presume it indicates at how well supply reacts to demand.