Housing and finance markets in Europe: their structure and relationship to macro

economies

Christine Whitehead, London School of Economics and Political Science

European Union Social Situation Monitor

Seminar on Housing

Brussels

11th December, 2014

Housing and Finance Markets in Europe • The vast majority of discussion (and available data)- on

housing and finance markets relates to tenure, to house prices and to mortgage markets;

• Particularly in this century much of the interest has concentrated on whether housing and finance markets have adversely affected economies at the macro level, although housing experts tend to be more interested in the negative impact of macro- economics, and particularly economic volatility on housing markets and welfare;

• Perhaps it is worth pointing out that in the main these concerns are concentrated in well-housed Western Europe, while the major social issues remain heavily concentrated in Eastern Europe.

Severe Housing Deprivation

Tenure by Population

Ratio of Outstanding Residential Mortgage Loans to GDP (%)

2001 2007 2012 Latest Owner-

occupation rate

USA 60 86 69 66 (2010)

Australia 50 (2002) 85 69 (2010)

Austria 14 24 28 57 (2010)

Belgium 27 38 49 78 (2007)

Czech Republic 2 (2002) 10 14 79 (2010)

Germany 53 48 45 46 (2011)

France 22 35 43 58 (2011)

UK 57 83 81 65 (2011)

Denmark 71 93 101 53 (2012)

Finland 20 35 44 74 (2011)

Iceland 73 107 n/a 77 (2009)

Ireland 33 75 78 70 (2011)

Netherlands 73 96 108 56 (2009)

Norway 42 60 70 85 (2003)

Portugal 43 60 67 74 (2011)

Slovenia 0.5 8 15 78 (2009)

Spain 33 61 61 82 (2011)

Sweden 48 66 81 64 (2011)

Switzerland 113 (2003) 132 (2006) 103 44 (est 2010)

Euro zone 43 (2004) 49 52 67

Sources: EMF/OECD

Pre and Post the Financial Crisis

• The general understanding is often that there was a very consistent pattern of house price increases linked to the expansion of residential debt across much of Europe prior to the financial crisis and that the outcome of that crisis was also fairly consistent;

• Equally a major source of the problems arose from deregulation of finance markets and poor quality lending;

• However deregulation started decades before the crisis and there remain enormous differences within Europe with respect to both mortgage and housing systems – generating very different experiences across countries;

• Moreover to the extent that there were similarities these suggest three or even four stages rather than two - a long period of relatively stable expansion; significant evidence of ‘bubbles’ in some countries from early 2000s; differential impacts of the financial crisis on house prices; followed by very different experiences, especially post 2010;

• In Eastern Europe most countries have not been affected specifically by the housing finance issues to anything like the same degree - except Hungary and to a lesser extent Poland particularly because of FX loans. They have of course been affected by the subsequent recession.

Real House Prices (seasonally adjusted, index based in 2010) 1995-2010, Quarterly

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Great Britain Real HousePrices

Ireland Real House Prices

Denmark Real House Prices

Spain Real House Prices

The Netherlands Real HousePrices

Real House Prices (seasonally adjusted, index based in 2010) 1995-2010, Quarterly

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Sweden Real House Prices

Finland Real House Prices

France Real House Prices

Real House Prices (seasonally adjusted, index based in 2010) 1995-2010, Quarterly

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Belgium Real House Prices

Norway Real House Prices

Real House Prices (seasonally adjusted, index based in 2010) 1995-2010, Quarterly

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Germany Real House Prices

Switzerland Real House Prices

Real House Prices (seasonally adjusted, index based in 2010) 2010-2014, Quarterly

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Ireland Real House Prices

Spain Real House Prices

Italy Real House Prices

The Netherlands Real House Prices

Real House Prices (seasonally adjusted, index based in 2010) 2010-2014, Quarterly

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Great Britain Real House Prices

France Real House Prices

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Real House Prices (seasonally adjusted, index based in 2010) 2010-2014, Quarterly

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Germany Real House Prices

Switzerland Real House Prices

Norway Real House Prices

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Great Britain Nominal Price

Great Britain Real Price

Germany Nominal Price

Germany Real Price

Nominal and Real House Prices (seasonally adjusted, index based in 2010) 1995-2014, Quarterly, Great Britain and Germany

Issues arising from the Financial Crisis • The expectation among economies with high household debt and open economies was that

there would be large scale mortgage default and problems of negative equity and possessions (as in the early 1990s);

• In the main this did not happen, significantly because of lower interest rates and variable rate mortgages – but also because unemployment did not rise as expected;

• Major exceptions include Iceland, Ireland, and Spain not only because of the depth of their crises but also because of high supply elasticities, massive overhangs of new supply and the proportion of their real economies involved in the construction sector;

• The biggest finance problems were with respect to the banking sector and often on the Treasury management side with high exposure to lending to residential development rather than directly related to mortgage market failure;

• However there have been large reductions in access to mortgage finance resulting in low levels of transactions and the exclusion of new entrants from the owner-occupied market;

• One result has been less downward adjustment in house prices in many countries than expected or probably desirable – and now considerable evidence of rising house prices even though economies are stagnating or growing very slowly;

• Particular issues of increasing differentiation within countries with house price rises concentrated in areas of housing pressure.

Most Important Effect: Lack of Investment? • While, for many European countries, the financial markets have worked better

than feared, the biggest continuing problem is that investment levels have fallen drastically across much of Europe; construction industries have been destroyed; debt finance for investment remain a major problem and risks are still seen to be too high;

• The recession that followed the financial crisis has been longer lasting and government policies to stimulate investment have been replaced by greater austerity measures;

• What upturn there has been has been extremely slow – many countries do not expect to get back to ‘normal’ levels of investment for many years;

• Where there is expansion bottlenecks are occurring rapidly and much of any increased demand is coming out in higher prices;

• The housing situation for consumers is being worsened by mortgage market regulatory responses which are making it more difficult for households to enter owner-occupation in most European countries – often excluding households that could afford to buy over their lifetimes;

• Increasing importance of private rental markets – and increasing concerns about high rents and calls for additional regulation – but equally a desire to bring in more equity finance for the rental market.

Housing Completions (000s)

2001 2007 2012 Year with

highest/lowest

output levels

Completions

per 000

population

over 18,

2007

USA 1,571 1,502 649 2006/2012 6.7

Austria

(building

permits)

40

46

42

2006/2010

6.8

Belgium (starts) 42 55 42 2006/2002 6.5

Czech Republic 25 42 29 2007/2001 9.8

Germany 326 211 215 2001/2009 3.1

France (starts) 303 435 304 2007/2009 8.7

UK 192 234 136 2007/2009 4.8

Denmark 21 25 10 2006/2009 5.8

Finland 27 30 28 2005/2009 7.1

Iceland 2 3 1 2007/2011 12.8

Ireland 53 78 9 2005/2012 23.5

Netherlands 73 80 58 (2011) 2009/2010 6.2

Norway 22 30 19 (2011) 2007/2010 8.2

Portugal 115 67 23 2002/2012 7.6

Slovenia 7 8 4 2008/2012 4.7

Spain 366 641 120 2007/2012 17.3

Sweden 15 31 26 2008/2010

) Source: EMF

Residential investment, share of nominal GDP

Conclusions – Moving towards greater stability? • There is still massive concern at the macro level about the possibility that housing

and construction more generally will knock economies off course and undermine stable economic growth;

• There is further concern that deleveraging has not significantly increased resilience and that rising interest rates could be difficult to manage

• But at the macro level there remains relatively little understanding of how property markets operate and how interventions may play out

• Governments tend to place heavy reliance on banking capital ratios and limiting loan to value ratios as well as on increased regulation - but do these address the fundamentals?

• An important result in many countries is that the gulf between the haves and the have nots is increasing. Those already well housed have suffered little from either the financial crisis or the lack of investment; those trying to enter the housing market are finding it increasingly difficult – with potential negative impacts on labour markets;

• But perhaps the most important conclusion is that there is very little evidence that housing and finance systems are working better or that government interventions are significantly improving efficiencies

• We are nowhere near a long run stable equilibrium – and unlikely to be so in the forseeable future.