Property Bubbles and the Driving Forces in the PIGS Countries

1. Philipp Klotz1 Tsoyu Calvin Lin2 Shih-Hsun Hsu3 1 Ph.D. student, International Doctoral Program in Asia-Pacific Studies, National ChengChi University, Taiwan. Email: 100265504@nccu.edu.tw. 2 Professor, Department of Land Economics, National ChengChi University, Taiwan. Email: tsoyulin@nccu.edu.tw. 3 Assistant Professor, Department of Economics, National ChengChi University, Taiwan. Email: shhsu@nccu.edu.tw. Property Bubbles and the Driving Forces in the PIGS Countries Philipp Klotz

2. Agenda • Introduction • Framework and Methodology • a) Bubble • b) Monetary policy and bubble formation • Data • Empirical Analysis • a) Long-run dynamics • b) Short-run dynamics • Conclusion & Discussion Philipp Klotz

3. Introduction- PIGS countries BBB+ BB BBB- B- Source: Standard & Poor’s (June 2013) http://www.standardandpoors.com/ratings/sovereigns/ratings-list Philipp Klotz

4. Introduction- PIGS countries and construction sector • Construction industry as an important sector in the PIGS countries Source: Eurostat (June 2013) http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Philipp Klotz

5. Introduction- Research Questions • Due to strong reliance on the construction sector, the PIGS countries were severely hit by the downturn in the housing market • The literature and policy makers frequently identified monetary policy as a relevant factor in the formation of asset bubbles. • (ECB, 2011) Simple deviations of the money and credit aggregates from a trend that exceed a given threshold provide a useful predictor of costly boom and bust cycles • (ECB, 2012) Ballooning credit and spending excesses overheated the economy in Ireland and misdirected resources during the booming years before the crisis • This paper addresses two central questions • 1) To which extent did the PIGS countries experience real estate bubbles throughout the period from 1999 to 2012? • 2) What is the role of the monetary policy of the ECB in the formation of property bubbles? Philipp Klotz

6. Framework & Methodology- Bubble Philipp Klotz

7. Framework & Methodology- Monetary policy and bubble formation Philipp Klotz

8. Data- Bubble Philipp Klotz

9. Data- WACC Philipp Klotz

10. Data- Key Interest Rate & Euribor Philipp Klotz

11. Data- Lending for house purchase-to-GDP Philipp Klotz

12. Data- Unit Root Philipp Klotz

13. Empirical analysis- Long-run relationship Philipp Klotz

14. Empirical analysis- Short-run relationship Philipp Klotz

15. Empirical analysis- Short-run relationship: IRF Philipp Klotz

16. Empirical analysis- Short-run relationship: IRF Philipp Klotz

17. Empirical analysis- Short-run relationship: Variance Decomposition Philipp Klotz

18. Conclusion & Discussion • 1) To what extend did the PIGS countries experience real estate bubbles throughout the period from 1999 to 2012? • Spain and Ireland experienced the largest bubble • Followed by Portugal with a small positive bubble and Greece with a negative bubble • 2) What is the role of the monetary policy of the ECB in the formation of property bubbles? • Why are there differences? Philipp Klotz

19. Conclusion & Discussion • Differences in the financial system • Interest rate channel: Interest rates set by the ECB are transmitted differently • Credit channel: Monetary policy affects domestic credit supply differently • Diverging Fiscal & Macro prudential policies • 1) Countries with low interest and tax rates as well as relatively high LTV-ratios have the potential to experience large positive property bubbles • 2) Central bank’s policies are crucial to trigger the boom & burst of housing bubbles Philipp Klotz

20. Thank you! Philipp Klotz