Security of Housing Investment in a European Context Diana Kasparova Policy Studies Institute United Kingdom ENHR 2006

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

Rate of Real House Prices Basic statistics Country Owner occupation (%) Volatility of house prices around the trend Annual Growth Rate of Real House Prices Inflation 2000 +/- 2 1971-2001 2000-2005 Dec 05/Dec 04 Austria 49.1 3.54 1.6 Belgium 74.2 14.3 2.1 2.8 Denmark 53.2 13.4 1.3 5.5 2.2 France 56.0 7.6 1.2 9.4 1.8 Germany 40.5 11.1 0.1 -2.8 Sweden 58.0 19.0 0.0 6.0 Greece 80.0 3.45 3.5 Portugal 64.01 0.46 2.5 UK 70.0 15.1 3.3 9.9 1.9 Ireland 77.4 17.4 3.1 7.8 Spain 85.02 17.3 3.33 12.2 3.7 Finland 64.6 13.5 0.7 3.8 1.1 NL 53.0 25.1 2.6 2.0 Italy 75.5 15.5 1.5 6.6 Lux 70.8 2.67 3.4 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

Demand- and Supply-side systems Country Housing policy and Taxation Mortgage markets Housing Supply Germany Subsidies encourage new build; Until 1996 taxation favoured relatively rich. Growth in o/o in 30 years 36% - 41% Difficult to enter LTV (65% ave) based on ‘permanent’ characteristics Indirect impact through supply of social housing No land speculation NL Since 1989 subsidies favour owner-occupiers; Taxation favours owner-occupation. Growth in o/o in 30 years 35% - 53% Deregulated; Average LTV 90%; Indebtedness doubled since 1990; Links to insurance policies; Scope for further growth. Heavy involvement of LA in land ownership, distribution Centralised planning problem; Higher share of owner-occupation in new build UK No tax preferences since 2000. Growth in o/o in 30 years 51% - 70% Median LTV 90%; Diversity of products and lenders Mainly private land ownership; Land speculations Barker (2004) Spain Supply-side subsidies linked to interest rates; Taxation favours new build but not letting out. Growth in o/o in 30 years 67% - 85% Deregulated, esp after 1994; Maximum LTV allowed by law 80%; Scope for consolidation; Scope for further growth Mainly private land ownership; Land speculations; Responsive housebuilding

House prices in the context Country Housing policy and Taxation Effect on house prices Mortgage rates Relationship with house prices Housing Supply Income, Unemployment, Demography Germany Yes, stabilising No Responsive Yes NL Yes, fuelling Less important until 1989 More important after 1989 Weakening since 1990s Yes/Feedback via equity withdrawal UK Yes until 2000 Neutral after 2000 Yes, after 1984 Inelastic Yes/Feedback via equity withdrawal and disposable income Spain Yes, but not as strong as with non-monetary factors Responsive in 1990s Yes/ Feedback via construction industry

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

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