The role of the land market to The role of the land market to provide financial stability in the EU provide financial stability in the EU

marketsmarkets

Professor Elias DinenisProfessor Elias DinenisNeapolis University PafosNeapolis University Pafos

The place of the Land Market in the EconomyThe place of the Land Market in the EconomyThe European Property MarketThe European Property MarketCan we talk about a Can we talk about a European Property European Property Market?Market?

2

House Price Indices 2005 =100House Price Indices 2005 =100

Source : Eurostat33

The real estate markets are closely linked like the equity markets

The place of the Property Market in the The place of the Property Market in the EconomyEconomy

There are other players of course which are not included here mainly the

governmentgovernment, other institutional investors such as pension funds and

insurance companies and of course the capital markets which interact with

the property markets

BANKSBANKS PROPERTYMARKETSPROPERTYMARKETS

REAL ECONOMY

4

The property marketsThe property markets

Many property markets – residential – commercial (retail, industrial, offices etc)

Trading of services, land, space and property based securities

As any other market it is the resource allocation mechanism

It determines the price of property

5

The property market and the real economyThe property market and the real economy

Supply Inelastic in the short run

Construction activity a very important component of the economy (percentage of GDP, percentage of fixed investment

Links to other profession

Innovation and new knowledge creation

Infrastructure and productivity

Strong Multiplier effects

6

High property prices create wealth effects

Wealth effects lead to higher consumption

High wages Probably balance of

payments problems Monetary policy

reaction

Number of Units

Price

Spread on Greek BondsSpread on Greek Bonds

Cheap Credit etcCheap Credit etc

Cheap credit created asset bubbles

especially in housing

Increased public sector debt

Wealth effects increased wages

consumption and imports

Spain: Exposure of Credit Institutions to the Property Sector Spain: Exposure of Credit Institutions to the Property Sector (In percent of total loans to the private sector) Property and Banks(In percent of total loans to the private sector) Property and Banks

9

Deficit as % of GDPDeficit as % of GDP

Composition of DebtComposition of Debt

Total Debt as % of GDPTotal Debt as % of GDP

Unit Labour CostsUnit Labour Costs

Trade Deficit as % of GDPTrade Deficit as % of GDP

Construction and current account deficitConstruction and current account deficit

15

GDP growth GDP growth

Unemployment RateUnemployment Rate

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

18

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

Spending in construction as a share of GDPSpending in construction as a share of GDP

19

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

20

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt

Commercial PropertyCommercial Property

21

Can the property sector kick start a Can the property sector kick start a recoveryrecovery

22

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets

Real Estate sales Real Estate sales

Sourse: JP Morgan Cazenove European Property Handbook Time for Heavy Lifting – Remain constructive

Banks 231 55.99%

Government disposals 117 28.36%

German 29 7.03%

CMBS 27 6.54%

Asset Trading by listed companies 8.6 2.08%

412.6 100.00%

23

Can the property sector kick start a Can the property sector kick start a recoveryrecovery

24

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. Forced sale depress prices

Sales and Depressing EffectSales and Depressing Effect

25

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

26

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. Forced sale depress prices5. There is a funding gap

Commercial Property FundingCommercial Property Fundingyear – end 2010year – end 2010

27Source: DTZ Research

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

28

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. There is a funding gap 5. Uncertain macroeconomic environment

Macroeconomic OutlookMacroeconomic Outlook

29

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

30

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. There is a funding gap 5. Uncertain macroeconomic environment6. Prices do not clear quickly enough to restore equilibrium

Demand Driven DownturnDemand Driven Downturn

31

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

32

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. There is a funding gap 5. Uncertain macroeconomic environment6. Prices do not clear quickly enough to restore equilibrium7. Anaemic prices to generate wealth effects

Quarterly House PricesQuarterly House PricesAverage Indices for euro area and EU 27 (2005=100)Average Indices for euro area and EU 27 (2005=100)

33

Quarterly House Prices in Euro Area and EU 27Quarterly House Prices in Euro Area and EU 27% change compared to same quarter of previous year% change compared to same quarter of previous year

34

Can the property sector kick start a Can the property sector kick start a recovery?recovery?

35

1. Excess Supply of Residential and Commercial Units as a result of overexpansion during the boom years

2. Recession increases inability to service debt3. New regulations are forcing banks to sell property assets in order

to improve their balance sheets4. There is a funding gap 5. Uncertain macroeconomic environment6. Prices do not clear quickly enough to restore equilibrium7. Anaemic prices to generate wealth effects

with great difficultywith great difficulty