Diana Kasparova Policy Studies Institute United Kingdom ENHR 2006 Security of Housing Investment in a European Context
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 demand- and 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 owner-occupation 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 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
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
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 owner-occupation • 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 (low-income) 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