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

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Presentation on theme: "Housing Markets in Europe Is the worst over? Michael Ball Henley Business School University of Reading"— Presentation transcript:

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

2 Huge variation in housing market performance across Europe CURRENTOVER CYCLE Annual % change% change 2013 q2 2005q1-2008q22008q2-2013q2 European Union -1%24%-7% Euro area -2%16%-6% 1 Ireland 1%23%-47% 2 Latvia 9% -37% 3 Spain -11% -36% 4 Lithuania 2% -32% 5 Croatia -20%39%-29% 6 Cyprus -9%40%-25% 7 Slovakia 1% -22% 8 Netherlands -7%13%-19% 9 Estonia 8%96%-19% 10 Hungary -5% -18% 11 Slovenia -5% -15% 12 Portugal -4% -14% 13 Denmark 3%37%-13% 14 Czech Republic -1% -8% 15 United Kingdom 3%22%-1% 16 France -1% 2% 17 Iceland 5%55%2% 18 Malta 4%60%5% 19 Belgium 0%28%9% 20 Germany* 5%-1%10% 21 Finland 1%20%14% 22 Luxembourg 5% 17% 23 Sweden 5%39%17% 24 Norway 6%35%31% * q Source: Eurostat 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 But imperfect correlation Cannot understand current situation without understanding the past decade & specific country/city dynamics UoR - MB2

3 Longer-run price dynamics: the crash & recovery OVER CYCLE % change 2005q1-2008q22008q2-2013q2 European Union24%-7% Euro area16%-6% Ireland 23%-47% Latvia -37% Spain -36% Lithuania -32% Croatia 39%-29% Cyprus 40%-25% Slovakia -22% Netherlands 13%-19% Estonia 96%-19% Hungary -18% Slovenia -15% Portugal -14% Denmark 37%-13% Czech Republic -8% United Kingdom 22%-1% France 2% Iceland55%2% Malta60%5% Belgium28%9% Germany*-1%10% Finland20%14% Luxembourg 17% Sweden39%17% Norway35%31% 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 - MB3

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 - MB4

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 - MB5

6 Housebuilding has been worst affected Housebuilding slumped in aftermath of 2008 financial crisis Compounded by Euro crisis Biggest changes seen in permits data – But they exaggerated pre expansion Greater cyclical fluctuations in housebuilding inevitable – but past 5 years worst for generations EU Building permits (blue line) and output (brown line) UoR - MB6

7 Large variations in housebuilding across Europe Annual growthGrowth 2013 q22010q q4 Euro area-15%-19% EU-17%-15% Greece-83%-77% Denmark-67%-68% Netherlands-50%-67% Portugal-65%-58% Cyprus-71%-55% Turkey-45%-50% Spain-64%-49% Ireland-43%-47% Croatia-47%-40% Italy-36% Hungary-40%-28% Slovakia38%-26% Finland-37%-21% Malta-34%-17% Czech Republic-11%-14% Poland-18%-14% Romania-11%-9% Sweden-11%-9% Slovenia-8%-6% Bulgaria7%-2% France-5%2% Luxembourg-4%6% Austria16%8% United Kingdom27%16% Estonia12%18% Germany29%21% Belgium32%21% Norway29%30% Lithuania98%38% Switzerland89% Latvia20%104% 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 - MB7

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 - MB8

9 The state of the economy matters % GDP growth OECD May Germany France Italy UK Belgium01.1 Ireland11.9 Netherlands Norway1.33 Poland Spain Sweden Switzerland1.42 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 - MB9

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 UoR - MB10 Average Eurozone mortgage interest rates 2003 Jan– 2013 Sept Red line over 5 yr fixed; Blue line less than 1fixed ECB

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 - MB11

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 - MB12

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 – EUs 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 - MB13

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 - MB14

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

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