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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% * 2012 4q 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- 2008 expansion Greater cyclical fluctuations in housebuilding inevitable – but past 5 years worst for generations EU Building permits (blue line) and output (brown line) 2000-2013 UoR - MB6

7 Large variations in housebuilding across Europe Annual growthGrowth 2013 q22010q4- 2012q4 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 201320132014 Germany0.41.9 France-0.30.8 Italy-1.80.4 UK0.81.5 Belgium01.1 Ireland11.9 Netherlands-0.90.7 Norway1.33 Poland0.92.2 Spain-1.70.4 Sweden1.32.5 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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