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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