Download presentation

Managing Housing Markets
Under EMU:
The Case of Ireland
John FitzGerald
8th December 11
www.esri.ie
Background




Housing markets are idiosyncratic
EMU changed environment for household sector
Drivers of housing market
Building sector bubble & the economy:



Output effects
Price effects and financial sector
Managing housing markets under EMU
Housing markets: idiosyncratic

US housing market


Europe: no general trend – even in 2007




First time that there is a general decline
Germany and Italy weak
Ireland, Spain, UK exceptional inflation
Was globalisation and financial integration
promoting a convergence in housing cycles?
Effects of new financial architecture?
Housing Markets in & out of EMU

Problems in some economies

Loose fiscal & monetary policy, still SGP compliant
 Ireland,

Spain, Estonia
Poor banking regulation
 Ireland

Also problems with wider building sector


Problems of building overinvestment
Baltics, Bulgaria, Romania
EMU – Effects ex post

Nearly a decade “shock free”


Lulled fears – hubris in Ireland
Reduction in risk premium





Not just EMU
Expected benefit – effects differ across members
Governments affected – e.g. Italy
Companies affected – SMEs, less benefit if large
Household sector – reduction in Ireland & Spain
 Had
been constrained?
Housing - Long-Term Drivers


Model of Ireland & Spain: Conefrey & FitzGerald, 2010
Income, cost of building


User cost



Must be embedded in a model of the economy
Expectations and incorporate subsidies
Effects of different expectations regimes
Demographics

Natural increase, migration – Ireland & Spain different

Culture, preferences – “headship rates”?
Holiday homes – Spain

Financing bubble – credit and balance of payments

Dwellings per 1000 Adults, 2001
All Dwellings
Denmark
France
Germany
Ireland 2001
Ireland 2006
Netherlands
Poland
Spain
UK
620.8
633.6
598.5
525
574
534.0
453.5
655.1
574.8
Occupied
594.6
525.6
464
478
534.0
421.2
443.6
550.8
Headship Rates
80
70
%
60
Ireland
Germany
UK
50
40
30
20
10
2024
2529
3034
3539
4044
4549
Age
5054
5559
6064
6559
7074
Irish Housing Demand - Components
Cost of Capital

EMU and financial liberalisation



Fall in risk premium especially for households
Benefits economy – if managed correctly
Real cost of capital


Companies – inflation in output prices
Households – depends on local consumer price
Risk premium: percentage points
Relative to DM
1980-98
1985-98
Ireland
2.0
1.6
Spain
1.4
1.9
UK
2.1
Real Interest Rates
12
10
8
6
4
2
0
-2
-4
1980
1985
1990
Ireland
1995
Spain
2000
2005
Household sector financing


Borrow from banks to fund housing investment
If big financing requirement under EMU


Banks borrow abroad
Reduction in risk premium – real rates


Increased investment - Banks increase credit
If credit > domestic resources




Pre EMU – exchange risk premium – ration?
Post EMU – “unlimited” Euro area funding
Post EMU – even outside EMU cheap finance – Baltics, Poland?
Shows up in balance of payments
Net Foreign Liabilities of Banking System
70
60
% of GDP
50
40
30
20
10
0
1989
1991
1993
1995
1997
Ireland
1999
Spain
2001
2003
Poland
2005
2007
Role of Building in Economy

Effects of change in share:



Wealth effects?
Demand – output effects
Crowding out of tradable sector
 Competitiveness
 True

Crowding in of tradable sector in bust?
 How

cost of bubble – kill off tradable sector (Gros)
long?
Role of the labour market
 Building
labour intensive
Housing, % of GDP, 1970-08
Average
Max
Min
2007
France
5.4
10.0
4.1
4.0
Germany
6.5
7.8
5.2
5.5
UK
3.6
4.5
2.8
4.0
Ireland
6.1
14.0
3.7
12.3
Spain
5.4
9.4
4.1
9.2
Estonia 1993-08
3.3
6.8
2.0
6.5
Poland 1995-08
2.7
3.2
2.2
2.4
Housing investment share of GNP
16
14
% of GDP
12
10
8
6
4
2
0
Ireland
Spain
EU 15
Adjustment to date
GDP
Growth
Investment share of GDP
Unemployment rate
Country
Years
%
Start
End
change
change
Portugal
08-10
-1.2
22.5
19.0
-3.5
3.3
Greece
08-10
-6.4
19.1
14.7
-4.4
0.1
Ireland
07-10
-11.8
26.4
11.3
-15.1
9.1
Spain
07-10
-3.0
30.7
22.5
-8.2
11.8
Hungary
08-10
-5.6
20.6
17.7
-2.9
3.4
Romania
07-10
-1.5
30.2
22.7
-7.5
0.9
Lithuania
07-09
-12.2
28.3
17.1
-11.2
9.4
Estonia
07-09
-18.3
34.4
21.6
-12.9
9.1
Bulgaria
07-10
0.5
28.7
23.5
-5.2
3.3
Latvia
07-09
-21.4
33.7
21.5
-12.2
11.1
Managing Housing Markets

Not just housing – also property market


Ireland and Spain v the UK
Housing bubbles do a lot of damage


Through effects on real economy
Through effects on financial sector


Ireland and US v Estonia
EMU changes available instruments



Interest rates – not available
Fiscal policy & taxation
Financial regulation
Fiscal Policy

Fiscal policy to manage domestic demand




Targeted fiscal measures


Crowding out through domestic inflation
Ireland, Spain and Estonia needed surpluses
Surpluses need to increase – fiscal stance
Raise costs of housing for households
Targtind with Fiscal Instruments



Eliminate subsidies
Stamp duty – e.g. UK and Hong Kong
Tax on mortgage interest rates
Banking regulation




Failed to prevent problem in Ireland & Estonia
Domestic banks v Foreign banks
Domestic Banks:
Ireland




Irish banks largest but competitive market
Fight for market share
Regulator failed to protect Irish financial system
Failure especially on property
Banking Regulation


Foreign Owned Banks
Estonia



Ireland





Dangers known
No domestic banks
No attempt to regulate Irish or Foreign banks
Could Foreign banks have been reigned in?
Mortgages v property loans
Need for EU wide regulation?
Spain – foreign buyers
Banking regulation

Instruments

Capital requirements – e.g. Spain
 Foreign


Loan to Value ratio (Hong Kong)
Other instruments
 Share

banks?
of loans on property?
Why were banks stupid?
Conclusions

Ireland and Spain





Need more dwellings in long term
Mismanagement of housing markets has large
macro-economic costs
Crowds out tradable sector - unemployment
Costs of financial collapse dominate
Governments can manage housing market



(Don’t blame EMU, blame governments!)
Fiscal policy AND Financial regulation
Need EU banking regulation & EU banking system