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Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012
1. THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE
Kansas City, Missouri
September 25–28, 2014
Financial Fragility Applied to the Real Estate Sector: The
Case of Bogota Between 2003-2012
By:
GONZALO CÓMBITA MORA
FACULTY OF ECONOMICS AND SOCIAL SCIENCES
UNIVERSIDAD DE LA SALLE
BOGOTÁ, COLOMBIA
2. CONTENTS
1) Introduction
2) Backgrounds
3) Theoretical
framework
4) Empirical evidence
5) Conclusions
Bogota’s skyscraper new project the BD-BACATA
3. 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
4. 2. Backgrounds
• Mainstream’s point of
view:
a. Exuberance of the
fundamentals
b. Decisions are taken by
rational agents
c. 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
5. 3. THEORETHICAL FRAMEWORK
• Mainstream’s
perspective:
a. Isolating market and
individuals
b. Rational agents and
optimal behavior
c. Money does no count
and Pure exchange (r)
d. Bubble is not possible
e. Fundamentals are
based on micro
decisions
Y
d H
H F Y , r , ,
P
Y
r H
P
r P
H
H
H
d
( )
;
( )
*
*
( ) ( ) ( ) ( )
*
6. 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)
7. 4. Empirical data
4.1 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
10. 1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
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
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
FDI outflow of foreign earnings
11. 10,000
5,000
0
-5,000
-10,000
-15,000
-20,000
20002001200220032004200520062007200820092010201120122013
Goods and services Net factor income Net transfers
14
12
10
8
6
4
2
0
-2
-4
Agriculture Mining Manufacture Real state
sector
Whole
economy
o1-o4
o5-o8
o9-13
• Current account deficit:
Net factor income and
goods and services.
• Sectorial Growth
performance: Winners
and losers.
12. 5.50
5.30
5.10
4.90
4.70
4.50
4.30
4.10
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-I
LnTI
LnIPVN
5.6
5.4
5.2
5
4.8
4.6
4.4
4.2
4
10
9
8
7
6
5
4
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-I
lnNetinflow
LnIPVN
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
13. A. 2 Private sector
Increasing indebtedness
Credit elasticity
Fiscal and monetary
policy: interest rate,
spending
Speculation: real state
market
17. 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.