Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012

THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCEKansas City, Missouri

September 25–28, 2014

By:GONZALO CÓMBITA MORA

FACULTY OF ECONOMICS AND SOCIAL SCIENCESUNIVERSIDAD DE LA SALLE

BOGOTÁ, COLOMBIA

CONTENTS

1) Introduction 2) Backgrounds3) Theoretical

framework4) Empirical evidence5) Conclusions

Bogota’s skyscraper new project the BD-BACATA

1.INTRODUCTION

1999’s crisis, similar scenario external and internal boom.

Housing prices have been going up Government´s point of view:

locomotives (primary - real state sectors)and strong fundamentals.

Mainstream vs Post Keynesianism Housing bubble = triggers

macroeconomic crisis (2008) Empirical evidence: financial

fragility

2. Backgrounds• Mainstream’s point of view:a. Exuberance of the

fundamentals b. Decisions are taken by

rational agentsc. Supply and demand

determinants: income, land price, interest rate, builder’s cost and normal recovery after 1999’s crisis.

d. Test possible misalignment: current prices and long run ones.

• Heterodox’s point of view:a. Marxism b. Data mistakes: Housing

Prices, land prices and leasing.

c. New data: bubble has been making

d. Results: house’s price cause increases in land’s price, Rise in prices are symptoms of bubble

e. There are few analysis: work to do for heterodox

3. THEORETHICAL FRAMEWORK• Mainstream’s perspective:a. Isolating market and

individualsb. Rational agents and

optimal behaviorc. Money does no count

and Pure exchange (r)d. Bubble is not possiblee. Fundamentals are based

on micro decisions

HrYP

PrYFH

PrYH

H

Hd

Hd

)(

,,,

;)(

*

*

)()()()(

*

3. THEORETHICAL FRAMEWORK• Post keynesian’s perspective:a. Uncertainty and procedural

rationality: don´t drive the economy towards full equilibria

b. Monetary economy: fuels Bubble & banking role

c. Macroeconomic phenomena: housing bubble as a symptom (fallacy)

d. Housing Bubble is symptom of macro instability

e. Financial fragility: private sector (Households) and foreign sector (TNT, volatility and exogenous terms of trade)

4. Empirical data4.1 Descriptive analysis:A. BP fragility Dutch disease: real vs financial Crowding out Free trade agreement T-NT: yield crisis Expectations: expand bubble Primary exports vs manufactured

B. Private fragility Increasing indebtedness Elastic fiscal and monetary policies

4.2 Time series analysis: Two strategies: prices or credit

supply First strategy-Variables: Stationary test VAR-VEC

4.1 Descriptive analysis: sectoral balance

• Deficit zero• External and private

deficit • Causes?• Consequences: two

fragilities

20002001200220032004200520062007200820092010201120122013

-5

-4

-3

-2

-1

0

1

2

3

4

5

(G-T)/Y (X-M)/Y (S-I)/Y

A.1 External fragility

Low inflation rate scenario

Nominal and real exchange rate appreciation

Dominance of financial account (Bresser-Pereira)

Yield crisis: Double Crowding out-(within exports and TNT-RSS )

20002001

20022003

20042005

20062007

20082009

20102011

20122013

7

7.2

7.4

7.6

7.8

8

8.2

4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

lnRLnE

20002001

20022003

20042005

20062007

20082009

20102011

20122013

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

PortafolioFDI

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20002001

20022003

20042005

20062007

20082009

20102011

20122013

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

outflow of foreign earnings/FDI

• Paradoxical situation: Boom in primary commodities = current account deficit

• Boom benefits foreigners o foreign firmsConsequences: financial fragility on BP

• Fuel real state bubble

20002001

20022003

20042005

20062007

20082009

20102011

20122013

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

FDI outflow of foreign earnings

20002001200220032004200520062007200820092010201120122013

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

Goods and services Net factor income Net transfers

Agriculture Mining Manufacture Real state sector

Whole economy

-4

-2

0

2

4

6

8

10

12

14

o1-o4o5-o8o9-13

• Current account deficit: Net factor income and goods and services.

• Sectorial Growth performance: Winners and losers.

2000-I

2001-I

2002-I

2003-I

2004-I

2005-I

2006-I

2007-I

2008-I

2009-I

2010-I

2011-I

2012-I

2013-I

2014-I4.10

4.30

4.50

4.70

4.90

5.10

5.30

5.50

LnTILnIPVN

2000-I

2001-I

2002-I

2003-I

2004-I

2005-I

2006-I

2007-I

2008-I

2009-I

2010-I

2011-I

2012-I

2013-I

2014-I4

5

6

7

8

9

10

4

4.2

4.4

4.6

4.8

5

5.2

5.4

5.6

lnNetinflowLnIPVN

Housing price and external boom Terms of trade: Dutch

disease (financial and real) Net inflows: FDI+portfolio

(from 2010) Saving excess thesis Expectations, foreign

lending, speculation feedback on real state sector

Fragile fundamentals, appreciation due to capital inflows, crisis yield and available credit resources fuel demand of housing

A. 2 Private sector Increasing indebtednessCredit elasticityFiscal and monetary

policy: interest rate, spending

Speculation: real state market

Private Indebtedness: • Loan portfolio:

consumption-Mortgages

• External debt: banking sector

5/17/2

002

1/17/2

003

9/17/2

003

5/17/2

004

1/17/2

005

9/17/2

005

5/17/2

006

1/17/2

007

9/17/2

007

5/17/2008

1/17/2

009

9/17/2

009

5/17/2010

1/17/2

011

9/17/2

011

5/17/2

012

1/17/2

013

9/17/2

013

5/17/2014

- 10,000.0 20,000.0 30,000.0 40,000.0 50,000.0 60,000.0 70,000.0 80,000.0 90,000.0

Loan portafolio

Mortgages Consumtion

20012002

20032004

20052006

20072008

20092010

20112012

12000

17000

22000

27000

32000

37000

42000

47000

52000

Private debtPublic debt

2000-I

2001-I

2002-I

2003-I

2004-I

2005-I

2006-I

2007-I

2008-I

2009-I

2010-I

2011-I

2012-I

2013-I

2014-I11

11.5

12

12.5

13

13.5

14

14.5

3

3.5

4

4.5

5

5.5

6

ln housing credit LnIPVN

Increase in credit´s elasticity Increase in correlation

between credit consumption and mortgages: >5 years

• Public policies:Government spendingRate of interest

200218200501 200643200821200950 2011292013080.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Hipot $Tasa $ SubsidiadaHipot UVRTasa UVR Subsidiada

2,0002,0012,0022,0032,0042,0052,0062,0072,0082,0095.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.5

2

2.5

3

3.5

4

4.5

5

5.5

LNSRSSLnIPVN

5. Conclusions • Mainstream has been unable to

understand Bogota’s Housing bubble

• Post Keynesian alternative: external and internal fragility

• External fragility: Increasing outflows (FDI earnings, crowding out, portfolio investment).

• External boom feeds housing bubble: Expectations, fragile fundamentals, appreciation due to capital inflows, yield crises, available credit resources fuel demand of housing.

• Internal fragility: increasing indebtedness of private sector and policy of zero deficit in public sector

• High credit elasticity, invest opportunity in speculative assets (financial and real), import linkages, fiscal and monetary policy.

• Housing Bubble is a macroeconomic phenomena

• Greece and Spain´s adjustment• Long run: Lower rates of growth.