Comments on: The booms in Spanish and Irish real estate make the US real estate boom look timid http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/ Thu, 14 Oct 2010 13:09:54 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Laurent GUERBY http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92515 Laurent GUERBY Sun, 26 Nov 2006 13:59:51 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92515 I really want to know who is holding all those euro and USA MBS ... I really want to know who is holding all those euro and USA MBS …

]]> By: Guest http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92514 Guest Sat, 25 Nov 2006 13:50:57 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92514 Moved to Dublin from US in 2005. House prices looked sky-high considering crap building quality, no facilities, lack of infrastructure. The prices went up another 20% then. However, the housing market slowed down in the last ~4-5 months. Upper end of the market is already showing price deflation (I am talking about Million plus euro houses). Some people think it is the interest rates, some think rumors of stamp duty reduction. I think perfect storm brewing for Irish housing market despite what spin doctors says. Here are my thoughts: 1- Ireland builds 80K to 90K houses per year. This is a big number considering this is only a ~ 4 million nation. There is an over supply of the houses (or flats) already. According to Sunday Business Times, 20% of the houses/flats in Ireland is unoccupied; bought for capital appreciation. What will happen when house price inflation stop? Too many houses on the market chasing few buyers=House price depreciation!! 2- Democratic factors: There is big flux of Eastern Europeans to Ireland. However these people are doing low-end job jobs, earning minimum wages (~8 Euro/per hour). I don't understand how these people could effort buying a house in Dublin. Or could be factor of pushing house prices higher. 3- Increasing ECB interest rates is putting Individuals and Banks under ever increasing stress. Ireland has the highest debt ratio per person in Europe. (In Dublin average house price is over 400K euro and Average industrial wage is ~35K/year) Irish Banks keep finding new ways of lending more money. A recent study published in Irish newspapers put Irish banks in the same group of Zimbabwe, and Azerbaijan banks (not very healthy). 4- ~15% Irish GDP is generated by export to US; highest in the Europe. Slowing down US economy is not good news for Irish Economy neither. Any slow-down in the economy will result in less investment in the already over priced Housing market, and it will affect individuals capacity to service their dept payments. Moved to Dublin from US in 2005. House prices looked sky-high considering crap building quality, no facilities, lack of infrastructure. The prices went up another 20% then. However, the housing market slowed down in the last ~4-5 months. Upper end of the market is already showing price deflation (I am talking about Million plus euro houses). Some people think it is the interest rates, some think rumors of stamp duty reduction. I think perfect storm brewing for Irish housing market despite what spin doctors says. Here are my thoughts:
1- Ireland builds 80K to 90K houses per year. This is a big number considering this is only a ~ 4 million nation. There is an over supply of the houses (or flats) already. According to Sunday Business Times, 20% of the houses/flats in Ireland is unoccupied; bought for capital appreciation. What will happen when house price inflation stop? Too many houses on the market chasing few buyers=House price depreciation!!
2- Democratic factors: There is big flux of Eastern Europeans to Ireland. However these people are doing low-end job jobs, earning minimum wages (~8 Euro/per hour). I don’t understand how these people could effort buying a house in Dublin. Or could be factor of pushing house prices higher.
3- Increasing ECB interest rates is putting Individuals and Banks under ever increasing stress. Ireland has the highest debt ratio per person in Europe. (In Dublin average house price is over 400K euro and Average industrial wage is ~35K/year) Irish Banks keep finding new ways of lending more money. A recent study published in Irish newspapers put Irish banks in the same group of Zimbabwe, and Azerbaijan banks (not very healthy).
4- ~15% Irish GDP is generated by export to US; highest in the Europe. Slowing down US economy is not good news for Irish Economy neither. Any slow-down in the economy will result in less investment in the already over priced Housing market, and it will affect individuals capacity to service their dept payments.

]]> By: bsetser http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92513 bsetser Sat, 25 Nov 2006 03:57:31 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92513 Emmanuel - I will redo the graphs on sunday (I have to be in the office to upload). not sure what happened. Emmanuel – I will redo the graphs on sunday (I have to be in the office to upload). not sure what happened.

]]> By: Emmanuel http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92512 Emmanuel Fri, 24 Nov 2006 14:15:40 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92512 Charles Gottlieb/Brad Sester--the charts don't seem to be displaying correctly with this post and in "Enough on China..." Please fix these soon as I am of course interested in seeing the charts. Charles Gottlieb/Brad Sester–the charts don’t seem to be displaying correctly with this post and in “Enough on China…” Please fix these soon as I am of course interested in seeing the charts.

]]> By: Anonymous http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92511 Anonymous Fri, 24 Nov 2006 13:16:29 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92511 Cassandra - persuasive arguments, and ones which we should bear in mind. Cassandra – persuasive arguments, and ones which we should bear in mind.

]]> By: Guest http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92510 Guest Fri, 24 Nov 2006 06:10:36 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92510 "En el informe se incluye una encuesta que revela, entre otros datos, que el 37,2% de los españoles sabe, ya sea por actuación propia o la de algún familiar o conocido, de alguien que ha hecho compra-venta de vivienda con el único fin de hacer negocio." (quote from El pais). This is the indicator for the existence of a bubble: people are buying houses with the sole intention of reselling them at a higher price. “En el informe se incluye una encuesta que revela, entre otros datos, que el 37,2% de los españoles sabe, ya sea por actuación propia o la de algún familiar o conocido, de alguien que ha hecho compra-venta de vivienda con el único fin de hacer negocio.” (quote from El pais).
This is the indicator for the existence of a bubble: people are buying houses with the sole intention of reselling them at a higher price.

]]> By: Skoobz http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92509 Skoobz Fri, 24 Nov 2006 06:07:16 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92509 Blad, and Charles: Please write more about the international housing bubble! Great stuff. Blad, and Charles: Please write more about the international housing bubble! Great stuff.

]]> By: koteli http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92508 koteli Fri, 24 Nov 2006 05:11:43 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92508 A little update from today El Pais, the first in the Economy section right now: La compra de una vivienda nos cuesta ya nueve años de sueldo (Buying a house takes us the full wages of 9 years) If you remove the upper classes or rich people, this means 20 years. http://www.elpais.com/articulo/economia/compra/vivienda/nos/cuesta/anos/sueldo/elpepueco/20061124elpepueco_3/Tes A little update from today El Pais, the first in the Economy section right now:

La compra de una vivienda nos cuesta ya nueve años de sueldo
(Buying a house takes us the full wages of 9 years)

If you remove the upper classes or rich people, this means 20 years.

http://www.elpais.com/articulo/economia/compra/vivienda/nos/cuesta/anos/sueldo/elpepueco/20061124elpepueco_3/Tes

]]> By: koteli http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92507 koteli Fri, 24 Nov 2006 04:53:20 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92507 Hi Charles, thank you for your work, and please, go on. To spend the 42% of the family wages to refy the mortgage is outrageous, indeed. But, it's not my invention. I read it in El País, quotting Spanish Bank last data. Just google-ing: 42% + hipoteca, I had several links to that info. Here go Cinco Días economic newspaper info, and several other links, for you to check the info. As I know you speak spanish, here go: El 42% de la renta se destina a la hipoteca de la vivienda El esfuerzo que tienen que hacer las familias para comprar un piso es cada vez mayor. Los hogares destinan ya el 42,1% de su renta bruta al pago de la hipoteca. Pero si se contabilizan las deducciones fiscales por la compra de vivienda el esfuerzo de los hogares se limita al 29,5%. Los datos financieros, publicados por el Banco de España, contrastan también con los del tercer trimestre de 2005, dónde el esfuerzo para comprar un piso tan sólo representaba el 36% de la renta bruta de una familia. En el aumento de este esfuerzo ha tenido mucho que ver el alza del precio de la vivienda que, aunque está empezando a desacelerarse sigue creciendo a un ritmo cercano al 10%. Tras los nueve primeros meses del año, el precio de una vivienda libre con una superficie de 94 metros cuadrados es 7,1 veces superior a la renta bruta anual de un hogar medio, lo que supone el mayor nivel desde que el Banco de España dispone de estadísticas precisas para obtener esta relación. El encarecimiento de la vivienda obliga a las familias españolas a contratar créditos hipotecarios cada vez mayores para comprarse una casa. Este crecimiento se hace evidente en del crédito hipotecario, que refleja el dinero que piden los ciudadanos a entidades de crédito para hacer frente a sus hipotecas. En cuatro años, este indicador ha crecido a tasas superiores al 20%. En volumen total el crédito hipotecario de los hogares ha pasado de 308.597 a 538.974 millones de euros (datos a agosto), récord histórico, informa Efe. El mayor esfuerzo de las familias para la compra de un piso está siendo agravado por la política monetaria del BCE, que se ha endurecido progresivamente. Así desde diciembre de 2005, la institución ha decidido cinco subidas de tipos de interés, que han hecho pasar el precio del dinero del 2% al 3,25%. Esas subidas se han dejado sentir en el euribor, la principal referencia para préstamos hipotecarios, que ha alcanzado su nivel más alto desde julio de 2002, al llegar al 3,79%. No obstante, las ayudas fiscales por compra de vivienda mitigan en parte la situación familiar. El esfuerzo por la compra de un piso se reduce al 29,5% de la renta anual si se contabiliza la bonificación de Hacienda. La inversión inmobiliaria en el extranjero crece un 87,3% Los españoles invirtieron en el primer semestre 1.225 millones de euros en comprar viviendas en el extranjero, un 87,3% más que en igual periodo de 2005, cuando el montante de la inversión ascendió a 654 millones, según datos del Banco de España.La carestía de la vivienda en España anima cada vez más a los inversores a buscar oportunidades en el extranjero, sobre todo en la Europa del Este. Sólo en el mes de julio, los españoles gastaron 241 millones, en comprar viviendas en el exterior un 85,38% más que en el mismo mes de 2005. http://www.cincodias.com/articulo/economia/42/renta/destina/hipoteca/vivienda/cdscdi/20061102cdscdieco_7/Tes/ http://www.lasemana.es/periodico/noticia.php?cod=15960 http://www.infohipoteca.net/ http://www.consumer.es/web/es/vivienda/2006/11/02/156939.php PS. I think the bubble is making people crazy. Hi Charles, thank you for your work, and please, go on.

To spend the 42% of the family wages to refy the mortgage is outrageous, indeed. But, it’s not my invention. I read it in El País, quotting Spanish Bank last data. Just google-ing: 42% + hipoteca, I had several links to that info. Here go Cinco Días economic newspaper info, and several other links, for you to check the info. As I know you speak spanish, here go:

El 42% de la renta se destina a la hipoteca de la vivienda

El esfuerzo que tienen que hacer las familias para comprar un piso es cada vez mayor. Los hogares destinan ya el 42,1% de su renta bruta al pago de la hipoteca. Pero si se contabilizan las deducciones fiscales por la compra de vivienda el esfuerzo de los hogares se limita al 29,5%.
Los datos financieros, publicados por el Banco de España, contrastan también con los del tercer trimestre de 2005, dónde el esfuerzo para comprar un piso tan sólo representaba el 36% de la renta bruta de una familia. En el aumento de este esfuerzo ha tenido mucho que ver el alza del precio de la vivienda que, aunque está empezando a desacelerarse sigue creciendo a un ritmo cercano al 10%.
Tras los nueve primeros meses del año, el precio de una vivienda libre con una superficie de 94 metros cuadrados es 7,1 veces superior a la renta bruta anual de un hogar medio, lo que supone el mayor nivel desde que el Banco de España dispone de estadísticas precisas para obtener esta relación. El encarecimiento de la vivienda obliga a las familias españolas a contratar créditos hipotecarios cada vez mayores para comprarse una casa.
Este crecimiento se hace evidente en del crédito hipotecario, que refleja el dinero que piden los ciudadanos a entidades de crédito para hacer frente a sus hipotecas.
En cuatro años, este indicador ha crecido a tasas superiores al 20%. En volumen total el crédito hipotecario de los hogares ha pasado de 308.597 a 538.974 millones de euros (datos a agosto), récord histórico, informa Efe.
El mayor esfuerzo de las familias para la compra de un piso está siendo agravado por la política monetaria del BCE, que se ha endurecido progresivamente. Así desde diciembre de 2005, la institución ha decidido cinco subidas de tipos de interés, que han hecho pasar el precio del dinero del 2% al 3,25%. Esas subidas se han dejado sentir en el euribor, la principal referencia para préstamos hipotecarios, que ha alcanzado su nivel más alto desde julio de 2002, al llegar al 3,79%.
No obstante, las ayudas fiscales por compra de vivienda mitigan en parte la situación familiar. El esfuerzo por la compra de un piso se reduce al 29,5% de la renta anual si se contabiliza la bonificación de Hacienda.
La inversión inmobiliaria en el extranjero crece un 87,3%

Los españoles invirtieron en el primer semestre 1.225 millones de euros en comprar viviendas en el extranjero, un 87,3% más que en igual periodo de 2005, cuando el montante de la inversión ascendió a 654 millones, según datos del Banco de España.La carestía de la vivienda en España anima cada vez más a los inversores a buscar oportunidades en el extranjero, sobre todo en la Europa del Este. Sólo en el mes de julio, los españoles gastaron 241 millones, en comprar viviendas en el exterior un 85,38% más que en el mismo mes de 2005.

http://www.cincodias.com/articulo/economia/42/renta/destina/hipoteca/vivienda/cdscdi/20061102cdscdieco_7/Tes/

http://www.lasemana.es/periodico/noticia.php?cod=15960

http://www.infohipoteca.net/

http://www.consumer.es/web/es/vivienda/2006/11/02/156939.php

PS. I think the bubble is making people crazy.

]]> By: Charles http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92506 Charles Fri, 24 Nov 2006 03:11:19 +0000 http://blogs.cfr.org/setser/2006/11/21/the-booms-in-spanish-and-irish-real-estate-make-the/#comment-92506 greg - Unfortunately, Housing prices at the EU level are very hard to compare. The ECB has just started a survey to get better Housing price data across the EU, to enable cross country comparison. From the data I have, Spain's square meter price are still below France's for example, however if you adjust for local costs, I believe that Spain's are relatively more expensive. I don't mention the word "bubble" in my comment. I am not convinced yet of a bubble, however I doubt the sustainability of the price surge as fundamentals seem shaky. Especially in the case of spain and ireland, the overexposure of the economy to housing and building exhibits inefficiencies at the micro level. It is simply not optimal for an economy of Spain and Ireland's caliber to allocate 10% and 15% respectively of their investment into construction. So this elements potentially hint towards a bubble, but are indeed no reliable proof. As Wolf puts it nicely in today's FT: "if people's expectations of future price increases are affected by their recent experience prices will tend to overshoot fundamentals: this is just how bubbles form." http://www.ft.com/cms/s/10757892-7b21-11db-bf9b-0000779e2340.html Koteli- Your figure on mortgage repayments seems outrageous to me. ECB says that the mortgage debt service to income ratio is barely at 5% for 2005... and it's growth is quite sluggish. In fact principal repayments have grown, but been compensated by slowing interest rate payments (due to lowness of interest rates). Michele- Italy is in fact also an interesting case study. However, they definitely fall out of any convergence perspective... given their growth track record. I believe Italy is a mixture of france and spain. France due to the regulation and Spain due to the societal factors. greg – Unfortunately, Housing prices at the EU level are very hard to compare. The ECB has just started a survey to get better Housing price data across the EU, to enable cross country comparison. From the data I have, Spain’s square meter price are still below France’s for example, however if you adjust for local costs, I believe that Spain’s are relatively more expensive.
I don’t mention the word “bubble” in my comment. I am not convinced yet of a bubble, however I doubt the sustainability of the price surge as fundamentals seem shaky. Especially in the case of spain and ireland, the overexposure of the economy to housing and building exhibits inefficiencies at the micro level. It is simply not optimal for an economy of Spain and Ireland’s caliber to allocate 10% and 15% respectively of their investment into construction. So this elements potentially hint towards a bubble, but are indeed no reliable proof.
As Wolf puts it nicely in today’s FT: “if people’s expectations of future price increases are affected by their recent experience prices will tend to overshoot fundamentals: this is just how bubbles form.”
http://www.ft.com/cms/s/10757892-7b21-11db-bf9b-0000779e2340.html

Koteli- Your figure on mortgage repayments seems outrageous to me. ECB says that the mortgage debt service to income ratio is barely at 5% for 2005… and it’s growth is quite sluggish. In fact principal repayments have grown, but been compensated by slowing interest rate payments (due to lowness of interest rates).

Michele- Italy is in fact also an interesting case study. However, they definitely fall out of any convergence perspective… given their growth track record. I believe Italy is a mixture of france and spain. France due to the regulation and Spain due to the societal factors.

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