Transcript Slide 1

Security of Housing Investment
in a European Context
Diana Kasparova
Policy Studies Institute
United Kingdom
ENHR 2006
Questions
• Is housing a secure investment and in which
circumstances?
• Does low inflation make it more secure?
• Should owner-occupation be promoted?
Return on housing investments
Equilibrium: user costs of housing are equal to rental
services received
Short-run: e.g. expectations grow, UCH decline, house
prices increase, possibility of volatility
Long-run: new equilibrium depends on demand and
supply elasticities
Demand and supply elasticities:
•are shaped by institutional structures of demandand supply-side systems
•may change over time as systems change
Housing investments and
economies
• Return on housing investments may influence
disposable income and wealth, and hence
economic stability
• Scale of the importance depends on owneroccupation rate, level of indebtedness and
ability to realise capital gains
Arguments
1. When:
- owner-occupation rate is high
- level of indebtedness is high
- mortgage market is deregulated
Sensitivity of house prices to interest rates is likely to be higher
Relationships between house prices and economies are likely to be
stronger
House prices are more likely to be volatile
Housing investments are more likely to be risky.
BUT these may be subdued/strengthened by:
‘real’ economic factors (e.g. unemployment)
housing and tax policies
housing supply
Arguments (continued)
2. Low inflation per se is unlikely to stabilise
house prices and security of housing
investments may not necessarily be higher.
3. Stabilisation of house prices is more important
at higher owner-occupation rates, although
attractiveness of owner-occupation may be
greater when house prices are volatile
Basic statistics
Country
Owner
occupation
(%)
Volatility of
house prices
around the trend
2000 +/- 2
1971-2001
Austria
49.1
Belgium
74.2
Denmark
Annual Growth
Rate of Real House Prices
Inflation
(%)
1971-2001
2000-2005
Dec 05/Dec 04
3.54
1.6
14.3
2.1
2.8
53.2
13.4
1.3
5.5
2.2
France
56.0
7.6
1.2
9.4
1.8
Germany
40.5
11.1
0.1
-2.8
2.1
Sweden
58.0
19.0
0.0
6.0
1.3
Greece
80.0
3.45
3.5
Portugal
64.01
0.46
2.5
UK
70.0
15.1
3.3
9.9
1.9
Ireland
77.4
17.4
3.1
7.8
1.9
Spain
85.02
17.3
3.33
12.2
3.7
Finland
64.6
13.5
0.7
3.8
1.1
NL
53.0
25.1
2.8
2.6
2.0
Italy
75.5
15.5
1.5
6.6
2.1
Lux
70.8
2.67
Source: Owner-occupation rate - from Scanlon and Whitehead (2004), Mulder (2005) and Atterhög (2005), ODPM. House price growth
rate – HM Treasury (2003); ECB (2003) as quoted in Doling et.al. (2004); Barker (2004); van den Noord (2006). Inflation - Eurostat.
1 1998; 2 1995; 31972-2001; 41987-2001; 51994-2001; 61988-2001; 71980-2001
3.4
Approach
• Diversity is represented by four case studies
• House price movements are considered
through the prism of institutional structures of
demand- and supply- side systems
• Period of analysis captures changes in the
systems and elasticities over time
Demand- and Supply-side systems
Country
Housing policy and Taxation
Mortgage markets
Housing Supply
Germany
Subsidies encourage new
build;
Until 1996 taxation favoured
relatively rich.
Growth in o/o in 30 years
36% - 41%
Difficult to enter
LTV (65% ave) based on
‘permanent’ characteristics
Indirect impact through supply
of social housing
No land speculation
NL
Since 1989 subsidies favour
owner-occupiers;
Taxation favours owneroccupation.
Growth in o/o in 30 years
35% - 53%
Deregulated;
Average LTV 90%;
Indebtedness doubled since
1990;
Links to insurance policies;
Scope for further growth.
Heavy involvement of LA in land
ownership, distribution
Centralised planning problem;
Higher share of owneroccupation in new build
UK
No tax preferences since
2000.
Growth in o/o in 30 years
51% - 70%
Deregulated;
Median LTV 90%;
Diversity of products and lenders
Mainly private land ownership;
Land speculations
Centralised planning problem;
Barker (2004)
Spain
Supply-side subsidies linked
to interest rates;
Taxation favours new build
but not letting out.
Growth in o/o in 30 years
67% - 85%
Deregulated, esp after 1994;
Maximum LTV allowed by law
80%;
Scope for consolidation;
Scope for further growth
Mainly private land ownership;
Land speculations;
Responsive housebuilding
House prices in the context
Country
Housing policy
and Taxation
Effect on house
prices
Germany
Yes, stabilising
NL
UK
Spain
Housing
Supply
Income,
Unemployment,
Demography
No
Responsive
Yes
Yes, fuelling
Less important
until 1989
More important
after 1989
Weakening
since 1990s
Yes/Feedback via
equity withdrawal
Yes until 2000
Neutral after
2000
Yes, after 1984
Inelastic
Yes/Feedback via
equity withdrawal
and disposable
income
Responsive in
1990s
Yes/ Feedback via
construction
industry
Yes, fuelling
Mortgage rates
Relationship
with house
prices
Yes, but not as
strong as with
non-monetary
factors
Discussion – Relationship between
house prices and monetary policy
• In deregulated markets, indebtedness is likely to be
higher (though saturation at some level is likely) and
this would increase
– the sensitivity of housing demand to income
– the sensitivity of income to interest rates
• Therefore, ceteris paribus, sensitivity of house prices to
both monetary and non-monetary factors is likely to be
higher in deregulated than in regulated markets;
taxation and supply elasticity gain more importance to
house price stability and hence security of housing
investments
Discussion – Low inflation and security
of housing investments
• At high debt levels, links between housing and the
economy are stronger due to:
– equity withdrawal (ability to realise capital gains)
– sensitivity of incomes to mortgage rate changes
(esp if variable)
• Therefore, via housing, economy grows more
dependent on monetary factors, especially if mortgage
rates are variable. Fluctuations in interest rates to keep
inflation under control may feed into house price and
economic fluctuations, and security of housing
investments may not necessarily be higher at low
inflation levels.
Discussion - Promotion of owneroccupation
• In deregulated markets, where owner-occupation is
promoted:
– a greater proportion of population may be affected
by house price changes and the greater may be the
impact on the economy
– changes in interest rates may impact on (lowincome) households’ ability to repay the debt, even
if inflation is low
• Therefore, countries may need to stabilise house prices
before promoting owner-occupation in order to avoid
economic instability, although house price volatility
may increase attractiveness of owner-occupation
Thank you