John Fitz Gerald 12th February 2010

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John Fitz Gerald 12th February 2010

  1. 1. Blowing Bubbles and Bursting Them: Housing Markets in Ireland and Spain John Fitz Gerald and Thomas Conefrey The Economic and Social research Institute, Dublin www.esri.ie
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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?
  7. 7. Housing - Long-Term Drivers • Income, user cost, cost of building, credit • Culture, preferences? • Demographics – Natural increase, “headship rates”, migration • Holiday homes
  8. 8. Dwellings per 1000 Adults All Dwellings Occupied Denmark 620.8 594.6 France 633.6 525.6 Germany 598.5 Ireland 2001 525 464 Ireland 2006 574 478 Netherlands 534.0 534.0 Poland 453.5 421.2 Spain 655.1 443.6 UK 574.8 550.8
  9. 9. Headship Rates 80 70 60 50 Ireland % Germany 40 UK 30 20 10 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 24 29 34 39 44 49 54 59 64 59 74 Age
  10. 10. Irish Housing Demand - Components 80 70 60 Thousand 50 40 30 20 10 0 -10 1991-96 1997-02 2003-06 2007-11 2012-16 2017-21 Population Growth Change in Headship Migration Vacant Obsolescence
  11. 11. Cost of Capital • EMU and financial liberalisation
  12. 12. Risk premium: percentage points Relative to DM 1980-98 1985-98 Ireland 2.0 1.6 Spain 1.4 1.9 UK 2.1
  13. 13. Net Foreign Liabilities of Banking System 70 60 50 % of GDP 40 30 20 10 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Ireland Spain Poland
  14. 14. 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
  15. 15. Real Interest Rates 12 10 8 6 4 2 0 -2 -4 1980 1985 1990 1995 2000 2005 Ireland Spain
  16. 16. 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
  17. 17. Housing, % of GDP, 1970-05 Average Max Min 2005 France 5.4 7.9 4.1 4.6 Germany 6.5 8.2 5.2 5.6 UK 3.6 4.5 2.8 3.9 Ireland 6.1 13.9 3.7 13.9 Spain 5.4 8.9 4.1 8.9 Poland, 1996-05 2.6 3.0 2.2 2.7
  18. 18. Housing Investment 16 14 12 % of GNP 10 8 6 4 2 0 1980 1985 1990 1995 2000 2005 2010 Ireland Spain EU 15
  19. 19. Housing Markets Today • How big a fall in price?
  20. 20. Maximum House Price Falls, % Denmark -37 Finland -50 France -18 Germany -15 Ireland -27 Netherlands -50 Sweden -38 United Kingdom -34 US -14
  21. 21. Housing Markets Today • How big a fall in price? • Impact on Economy – Demand impact – Ireland – Labour Market
  22. 22. Housing Markets Today • How big a fall in price? • Impact on Economy – Demand impact – Ireland – Labour Market • Speed of adjustment • Role of rental sector
  23. 23. Private Rental Share of Housing 100% 80% 60% 40% 20% 0% US UK Germany Spain Ireland Owner Occupied Social Private Rental
  24. 24. Managing Housing Markets • Housing bubbles can do a lot of damage • EMU changes instruments available to governments – Interest rates – Taxation – Financial regulation
  25. 25. General Government Balance 8 6 4 % of GDP 2 0 -2 -4 -6 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 Finland Denmark Ireland Spain
  26. 26. 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
  27. 27. 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?
  28. 28. 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
  29. 29. Trend GDP per capita: Finland Source: Wim Suyker, Netherlands Central Planning Bureau
  30. 30. Trend GDP per capita: Sweden Source: Wim Suyker, Netherlands Central Planning Bureau
  31. 31. GNP per capita 36 35 34 33 32 31 30 29 28 27 2000 2002 2004 2006 2008 2010 2012 2014
  32. 32. World Recovery Scenario 2009 2010 2010-15 2015-20 Annual % Growth Rate Average Annual % Growth GDP -7.2 -0.2 5.6 3.3 GNP -10.0 -1.5 5.4 3.2 Year End: 2009 2010 2015 2020 GGB, % GDP -11.8 -11.3 -3.3 -2.4 Balance of Payments, % GNP -2.5 0.5 3.5 4.0
  33. 33. GNP Growth Rates 8 6 4 2 0 % -2 -4 -6 -8 -10 -12 2009 2010 2010-15 2015-20
  34. 34. The Two Deficits 8 4 % of GDP 0 -4 -8 -12 -16 1980 1985 1990 1995 2000 2005 2010 2015 Balance of Payments General Government Balance
  35. 35. Net Acquisition of Financial Assets 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
  36. 36. 20 06 0 20 40 60 80 100 120 M 20 1 06 M 20 3 06 M 20 5 06 M 20 7 06 20 M9 06 M 1 20 1 Table C3, line 3 07 M 20 1 07 M 20 3 07 M 20 5 Combined NFLB+CB lending 07 M 20 7 07 20 M 9 07 M 20 11 08 M 20 01 08 M 20 03 08 M Net foreign liabilities of the banking system, % of GDP 20 05 08 M 20 07 Credit Institutions' borrowing from the Central Bank, % GDP, 08 M 20 09 08 M 20 11 09 M 20 01 09 M 20 03 09 M 20 05 09 M 20 07 09 M 09
  37. 37. 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
  38. 38. % of GDP -4 -2 0 2 4 6 8 10 12 14 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 General Government Balance 15
  39. 39. Budget Measures 200 9 Suppleme ntary Budgets 2010 Budget Effects in 2009 Full Y ear Effec ts in 2010 Tax revenue (i ncl PRSI 1,7 99 3,550 0 Current expe - 2,6 86 -3,200 -3,090 Capital expe -5 76 -576 - 961 Total ex an 5,0 61 7,326 4,051 % G DP 3 .00% 4.40% - 2.4 7%
  40. 40. Fiscal Stance Incremental Measure of Fiscal Stance (% of GNP +ve expansionary -ve contractionary) 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 76 78 80 82 88 90 92 00 02 04 06 4 86 4 96 98 08 10 8 9 19 19 19 19 19 19 19 19 19 20 20 20 20 19 19 19 20 20
  41. 41. 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?
  42. 42. 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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