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

3. Questions Is housing a secure investment and in which circumstances?
Does low inflation make it more secure?
Should owner-occupation be promoted?

4. 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

5. 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

6. 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

7. 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

8. 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
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; ; ; ; ; ;

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

15. Thank you