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Housing Markets in Europe Is the worst over? Michael Ball Henley Business School University of Reading [email protected] Huge variation in housing market performance across Europe CURRENT Annual % change % change % change 2013 q2 2005q1-2008q2 2008q2-2013q2 European Union Euro area 1 Ireland 2 Latvia 3 Spain 4 Lithuania 5 Croatia 6 Cyprus 7 Slovakia 8 Netherlands 9 Estonia 10 Hungary 11 Slovenia 12 Portugal 13 Denmark 14 Czech Republic 15 United Kingdom 16 France 17 Iceland 18 Malta 19 Belgium 20 Germany* 21 Finland 22 Luxembourg 23 Sweden 24 Norway * 2012 4q OVER CYCLE Source: Eurostat -1% -2% 1% 9% -11% 2% -20% -9% 1% -7% 8% -5% -5% -4% 3% -1% 3% -1% 5% 4% 0% 5% 1% 5% 5% 6% 24% 16% 23% 39% 40% 13% 96% 37% 22% 55% 60% 28% -1% 20% 39% 35% -7% -6% -47% -37% -36% -32% -29% -25% -22% -19% -19% -18% -15% -14% -13% -8% -1% 2% 2% 5% 9% 10% 14% 17% 17% 31% • Substantial variation in house price changes • Scale of impact of financial/fiscal crises • • From stimulus to disastrous NB: real price falls larger, add extra 10%+ • Notable housing market improvement in 2013 in some places • Suggests that the market bottoming out? • Though not for all countries/regions • Housing markets linked to wider economic and finance issues • But imperfect correlation • Cannot understand current situation without understanding the past decade UoR - MB & specific country/city dynamics 2 Longer-run price dynamics: the crash & recovery OVER CYCLE European Union Euro area Ireland Latvia Spain Lithuania Croatia Cyprus Slovakia Netherlands Estonia Hungary Slovenia Portugal Denmark Czech Republic United Kingdom France Iceland Malta Belgium Germany* Finland Luxembourg Sweden Norway % change % change 2005q1-2008q2 2008q2-2013q2 24% -7% 16% -6% 23% 39% 40% 13% 96% 37% 22% 55% 60% 28% -1% 20% 39% 35% -47% -37% -36% -32% -29% -25% -22% -19% -19% -18% -15% -14% -13% -8% -1% 2% 2% 5% 9% 10% 14% 17% 17% 31% • Substantial booms prior to 2008 – Except Germany, Switzerland & Austria • Large increases in mortgage debt – Limited deleveraging since • Crisis countries geographically concentrated – C.E.Europe, Islands (incl. Ireland, Iceland, Cyprus); Spain; Greece – All over-built, highly indebted – Long-recovery • not yet complete/underway UoR - MB 3 Strongest markets in recent years • Nordic (ex-Denmark) • Germany, Switzerland & Austria – Late bloomers • France – Political cycle • UK – Significant upswing in 2013 Drivers • Strength of economy • Low mortgage interest rates • Mortgage availability • Population/migration • Major cities take lead • Government policy – Variable impact due to fiscal conditions UoR - MB 4 Signs of some improvement in 2013 Levelling off • UK, Baltic States, Ireland, Denmark Continuing weakness • Netherlands, Croatia, Spain Renewed concerns • France, Belgium • Recoveries are fragile • But likely to continue – Monetary policy – Modest economic growth – Pent-up demand after long crisis • But is Europe growing fast enough? • Is there a threat from deflation in Eurozone? UoR - MB 5 Housebuilding has been worst affected EU Building permits (blue line) and output (brown line) 2000-2013 • Housebuilding slumped in aftermath of 2008 financial crisis • Compounded by Euro crisis • Biggest changes seen in permits data – But they exaggerated pre2008 expansion • Greater cyclical fluctuations in housebuilding inevitable – but past 5 years worst for generations UoR - MB 6 Large variations in housebuilding across Europe Euro area EU Greece Denmark Netherlands Portugal Cyprus Turkey Spain Ireland Croatia Italy Hungary Slovakia Finland Malta Czech Republic Poland Romania Sweden Slovenia Bulgaria France Luxembourg Austria United Kingdom Estonia Germany Belgium Norway Lithuania Switzerland Latvia Annual growth Growth 2013 q2 2010q4- 2012q4 -15% -17% -83% -67% -50% -65% -71% -45% -64% -43% -47% -36% -40% 38% -37% -34% -11% -18% -11% -11% -8% 7% -5% -4% 16% 27% 12% 29% 32% 29% 98% 89% 20% -19% -15% -77% -68% -67% -58% -55% -50% -49% -47% -40% -36% -28% -26% -21% -17% -14% -14% -9% -9% -6% -2% 2% 6% 8% 16% 18% 21% 21% 30% 38% 89% 104% • Much less signs of revival in housebuilding • Majority of countries are still seeing falls in permits – Though output declines may be less • Typically, housebuilding leads housing market cycle – In this upswing, it is lagging UoR - MB 7 Why is housebuilding lagging the cycle? • • • • Nature of crisis Oversupply of new and existing homes Low transaction levels New build consumers badly affected by unemployment & credit constraints – E.g. first-time buyers • Regulatory & building cost constraints remain • Lack of property development finance for small/medium sized enterprises & start-ups UoR - MB 8 The state of the economy matters % GDP growth OECD May 2013 2013 2014 0.4 1.9 France -0.3 0.8 Italy -1.8 0.4 0.8 1.5 Belgium 0 1.1 Ireland 1 1.9 -0.9 0.7 Norway 1.3 3 Poland 0.9 2.2 Spain -1.7 0.4 Sweden 1.3 2.5 Switzerland 1.4 2 Germany UK Netherlands • Housing markets generally strongest where economic growth has been strongest • In 2014, growth likely to be most robust in Nordic region, Germany, UK, & Poland • Some countries seeing turnaround from major economic slumps e.g. Ireland, Baltic States – Major aid to housing markets • World economy & financial system still fragile UoR - MB 9 Monetary policy has been accommodating Average Eurozone mortgage interest rates 2003 Jan– 2013 Sept Red line over 5 yr fixed; Blue line less than 1fixed • Average mortgage interest rates at historic lows – in many countries real rates are 1% or less, or even negative • ECB has supported mortgage supply ECB UoR - MB 10 But mortgage rationing has intensified • Lenders have tighten-up lending criteria Due to: – – – – Higher regulatory capital costs of mortgage lending Tighter screening of borrowers Imposed more up-front charges High default rates in some countries have raised lenders’ loan risk-aversion • Particularly hits new build – As purchasers often perceived as higher risk • E.g. first-time buyers • Though some of this context is cyclical, much is part of the ‘new terrain’ of housebuilding UoR - MB 11 Developer finance has been badly hit • Bankruptcies & loan defaults/restructurings in European residential development have been large – Though concentrated in some countries, widespread incidence throughout Europe • Lenders now wary or have withdrawn completely from this market • Particularly affects medium/small firms & potential new entrants • Classic churn of building/developer firms now turned solely into a one-way exit • Will badly affect upswing in housebuilding making recovery much weaker & longer • Will lead to greater firm concentration – Those that can obtain credit will greatly increase market shares • Governments have no response to this problem UoR - MB 12 Government policies • Demand-side stimulus policies have been commonplace but more recently have suffered from fiscal constraints – Markets were stimulated, then thrown into reverse e.g. France • Substantial emphasis on supporting first-time buyers – E.g. Poland, UK • Much needed ‘structural’ policy reform has avoided or fudged – high levels of regulation of housebuilding & development land • Some new policies worrying – Total uncertainty of new monetary policy concern with asset price inflation on housing markets – EU’s EU ‘alarm threshold’ of 6% in deflated HPI worrying • Some reforms suffer from ‘bad-timing’ forced by fiscal problems – E.g. Mortgage tax relief in the Netherlands • Pushing its housing market further down UoR - MB 13 The paradox of major European cities • While many countries housing markets froze following 2008, some cities’ ‘prime’ markets have blazed – London, Paris, Berlin, Stockholm, etc. • Reasons: – – – – International buyers Quantitative easing Worldwide phenomena Belief that low risk 25 Paris apartments All France 20 15 10 5 • Not true e.g. Paris apartments • Typically more volatile, not less • Can expect notable cooling to come 0 -5 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10 -15 – Though technology & globalisation, giving major cities a notable economic edge UoR - MB 14 Housing Markets in Europe Is the worst over? Michael Ball Henley Business School University of Reading