Housing Markets in Europe Is the worst over?

1. Housing Markets in Europe Is the worst over? Michael Ball Henley Business School University of Reading m.ball@reading.ac.uk

2. Huge variation in housing market performance across Europe • 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 • Butimperfect correlation • Cannot understand current situation without understanding the past decade & specific country/city dynamics Source: Eurostat UoR - MB

3. Longer-run price dynamics: the crash & recovery • 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

4. 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

5. 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

6. 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 pre-2008 expansion • Greater cyclical fluctuations in housebuilding inevitable • but past 5 years worst for generations UoR - MB

7. Large variations in housebuilding across Europe • 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

8. 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

9. The state of the economy matters • 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

10. Monetary policy has been accommodating • Average mortgage interest rates at historic lows • in many countries real rates are 1% or less, or even negative • ECB has supported mortgage supply Average Eurozone mortgage interest rates 2003 Jan– 2013 Sept Red line over 5 yr fixed; Blue line less than 1fixed ECB UoR - MB

11. 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

12. 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

13. 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

14. 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 • Not true e.g. Paris apartments • Typically more volatile, not less • Can expect notable cooling to come • Though technology & globalisation, giving major cities a notable economic edge UoR - MB

15. Housing Markets in Europe Is the worst over? Michael Ball Henley Business School University of Reading