john fitz gerald 12th february 2010
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Blowing Bubbles and Bursting Them: Housing Markets in Ireland and Spain
John Fitz Gerald and Thomas ConefreyThe Economic and Social research Institute, Dublin
www.esri.ie
Introduction
• EMU, housing and managing economies– EMU changed environment for household sector– Housing markets are idiosyncratic– Drivers of housing– Building in the economy & housing markets today– Managing regional economies under EMU
• What Next?– Dynamics of the Irish economy– Fiscal policy
EMU – Anticipated Effects
• Optimal currency area?– Dangers of shocks– Inappropriate monetary policy?
• Transactions costs and FDI– Small effects
• Risk premium– Lower interest rates for government
EMU – Effects ex post
• Nearly a decade “shock free”– Insulates against financial shocks – 1992, 2008
• Enhanced competition?• Reduction in risk premium
– Governments – yes– Companies – SMEs, less benefit if large– Household sector – major reduction
• EMU permitted more rapid adjustment to optimal housing stock
Household sector financing
• Borrow from banks• If big financing requirement
– Banks borrow abroad– Balance of payments deficit
• Reduction in risk premium – real rates– Increased investment -Banks increase credit – If credit > domestic resources
• Pre EMU – exchange risk premium – ration?• Post EMU – “unlimited” Euro area funding
Housing markets: idiosyncratic
• US housing market– First time that there is a general decline
• Europe– No general trend – even in 2006– Germany and Italy in doldrums– Ireland, Spain, UK exceptional inflation
• Is globalisation and financial integration promoting a convergence in housing cycles?
Housing - Long-Term Drivers
• Income, user cost, cost of building, credit• Culture, preferences?• Demographics
– Natural increase, “headship rates”, migration• Holiday homes
Dwellings per 1000 Adults
550.8574.8UK443.6655.1Spain421.2453.5Poland534.0534.0Netherlands478574Ireland 2006464525Ireland 2001
598.5Germany525.6633.6France594.6620.8Denmark
OccupiedAll Dwellings
Headship Rates
10
20
30
40
50
60
70
80
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-59
70-74
Age
%
IrelandGermanyUK
Irish Housing Demand - Components
-100
1020304050607080
1991-96 1997-02 2003-06 2007-11 2012-16 2017-21
Tho
usan
d
Population Growth Change in Headship Migration Vacant Obsolescence
Cost of Capital
• EMU and financial liberalisation
Risk premium: percentage points
2.1UK
1.91.4Spain
1.62.0Ireland
1985-981980-98
Relative to DM
Net Foreign Liabilities of Banking System
0
10
20
30
40
50
60
70
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
% o
f GD
P
Ireland Spain Poland
Cost of Capital
• EMU and financial liberalisation– Fall in risk premium especially for households
• Real cost of capital– Companies – inflation in output prices– Households – depends on local consumer price
Real Interest Rates
-4-202468
1012
1980 1985 1990 1995 2000 2005
Ireland Spain
Role of Building in Economy
• Affects of change in share:– Wealth effects, Demand effects
• Size of Housing/Building– Optimal v Actual capital stock
• housing, infrastructure
• Crowding out of tradable sector• Crowding in of tradable sector in bust?• Role of the labour market
Housing, % of GDP, 1970-05
2.72.23.02.6Poland, 1996-05
8.94.18.95.4Spain
13.93.713.96.1Ireland
3.92.84.53.6UK
5.65.28.26.5Germany
4.64.17.95.4France
2005MinMaxAverage
Housing Investment
02468
10121416
1980 1985 1990 1995 2000 2005 2010
% o
f GN
P
Ireland Spain EU 15
Housing Markets Today
• How big a fall in price?
Maximum House Price Falls, %
-34United Kingdom-14US
-38Sweden-50Netherlands-27Ireland -15Germany-18France-50Finland-37Denmark
Housing Markets Today
• How big a fall in price?• Impact on Economy
– Demand impact – Ireland– Labour Market
Housing Markets Today
• How big a fall in price?• Impact on Economy
– Demand impact – Ireland– Labour Market
• Speed of adjustment• Role of rental sector
Private Rental Share of Housing
0%
20%
40%
60%
80%
100%
US UK Germany Spain Ireland
Owner Occupied Social Private Rental
Managing Housing Markets
• Housing bubbles can do a lot of damage• EMU changes instruments available to
governments– Interest rates– Taxation– Financial regulation
General Government Balance
-8-6-4-202468
2000 2001 2002 2003 2004 2005 2006 2007 2008
% o
f GD
P
Finland Denmark Ireland Spain
Summary
• Ireland and Spain– Need more dwellings in long term– Mismanagement of housing markets has macro-
economic costs– Crowds out tradable sector– Costs a function of how far & how fast the fall
• Governments must manage housing market– EU-12 – especially Poland
• Don’t blame EMU – blame unwise governments
Implications• Fiscal policy should
– Prevent bubbles– Manage real exchange rate
• Balance of payments in regional economies– They matter– Private sector liabilities may become public– Indication of competitiveness
• Policy rules– Target a surplus– Needed a growing surplus– SGP the problem?
The Irish Economy
• Economic Background– There is a future!– Potential Growth– Balance of Payments
• Budget 2010– Fiscal Stance– Micro-economics of the Budget– Future Fiscal policy
Trend GDP per capita: Finland
Source: Wim Suyker, Netherlands Central Planning BureauSource: Wim Suyker, Netherlands Central Planning Bureau
Trend GDP per capita: Sweden
Source: Wim Suyker, Netherlands Central Planning BureauSource: Wim Suyker, Netherlands Central Planning Bureau
GNP per capita
27282930313233343536
2000 2002 2004 2006 2008 2010 2012 2014
World Recovery Scenario
4.03.50.5-2.5Balance of Payments, % GNP
-2.4-3.3-11.3-11.8GGB, % GDP
2020201520102009Year End:
3.25.4-1.5-10.0GNP
3.35.6-0.2-7.2GDP
Average Annual % GrowthAnnual % Growth Rate
2015-202010-1520102009
GNP Growth Rates
-12
-10
-8
-6
-4
-2
0
2
4
6
8
2009 2010 2010-15 2015-20
%
The Two Deficits
-16
-12
-8
-4
0
4
8
1980 1985 1990 1995 2000 2005 2010 2015
% o
f GD
P
Balance of Payments General Government Balance
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Company Household Government BOP
Net Acquisition of Financial Assets
0
20
40
60
80
100
120
2006
M120
06M3
2006
M520
06M7
2006
M920
06M11
2007
M120
07M3
2007
M520
07M7
2007
M920
07M11
2008
M0120
08M03
2008
M0520
08M07
2008
M0920
08M11
2009
M0120
09M03
2009
M0520
09M07
2009
M09Net foreign liabilities of the banking system, % of GDP
Credit Institutions' borrowing from the Central Bank, % GDP,Table C3, line 3Combined NFLB+CB lending
Budget 2010
• Major Reduction in Structural Deficit– ESRI estimate c. 4% – EU based estimate 9.4%– How much more to come?
• Fiscal Stance– Deflationary
• Microeconomics• Future Fiscal Policy
General Government Balance
-4-202468
101214
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
% o
f GD
P
Budget Measures
Effects in 2009Tax revenue
(incl PRSI
Current expe -2,686 -3,200 -3,090
Capital expe -576 -576 -961
Total ex an 5,061 7,326 4,051% GDP 3.00% 4.40% -2.47%
1,799 3,550 0
Full Year Effects in 2010
2009 Supplementary Budgets 2010 Budget
Fiscal StanceIncremental Measure of Fiscal Stance
(% of GNP +ve expansionary -ve contractionary)
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Microeconomics of 2010
• The Budget did the key job – but…• Distributional effects
– Budget 2010– Budgets 2009 + Budget 2010
• More revenue? wasted electricity subsidy!• Make welfare, training and education suitable
– Tax child benefit– Look at the system as a whole (incl. min wage)
• Pay – what is the strategy?
Future Fiscal Policy
• Department of Finance– Further €8.5 billion to reach 3% deficit
• ESRI estimate – Further €2 billion to reach 3% deficit
• To eliminate deficit – Cut a further €5 or €6 billion
• Wont know which is right till 2010– Prudent policy cut €3 billion in 2011
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