Housing markets, wealth and the business cycle Nathalie Girouard copyright with the author OECD Economics Department DG ECFIN workshop: Housing and mortgage markets and the EU economy Brussels, 21 November 2005
Real house prices increased unusually rapidly in recent years Index, 1995=100, logarithmic scale 400 Ireland U.K. Spain Netherlands Norway 300 200 100 40 1970 75 80 85 90 95 2000 05 Index, 1995=100, logarithmic scale 400 Australia Sweden Finland New Zealand France 300 200 100 40 1970 75 80 85 90 95 2000 05 2
Index, 1995=100, logarithmic scale 400 Denmark U.S.A. Italy Canada 300 200 100 40 1970 75 80 85 90 95 2000 05 Index, 1995=100, logarithmic scale 400 Switzerland Korea Germany Japan 300 200 100 40 1970 75 80 85 90 95 2000 05 3
Recent house price gains have been countercyclical Percentage deviation from trend 15 Real house prices (left scale) Output gap (right scale) Per cent of potential output 6 10 4 5 2 0 0-5 -2-10 -4-15 1975 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05-6 4
House price increases are more common across countries than before Number of countries 14 12 10 8 6 4 2 0 1975 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 5
From housing prices to economic activity: possible transmission mechanisms Consumption and housing wealth Consumption and borrowing capacity Residential investment and the profitability of construction 6
Impact of housing conditions on consumption: empirical evidence Changes in housing wealth have a significant effect on consumption in Australia, Canada, the Netherlands, the United Kingdom and the United States In France, Germany, Italy, Japan and Spain, the housing wealth effect appears to be smaller or insignificant Housing equity withdrawal has increased consumption in Australia, Canada, the Netherlands, the United Kingdom and the United States 7
Mortgage market indicators are correlated with the size of the wealth effect Mortgage debt ratios Housing equity withdrawal 0.10 Marginal propensity to consume out of housing wealth 0.10 Marginal propensity to consume out of housing wealth 0.08 Netherlands 0.08 Netherlands 0.06 Australia United Kingdom Canada R2 = 0.534 0.06 Australia United Kingdom Canada United States United States 0.04 0.04 R2 = 0.848 0.02 Spain 0.02 Spain Italy Japan Italy, Japan 0.00 France Germany 0.00 France,Germany -0.02 0 50 100 Mortgage debt 2002 (in% of GDP) -0.02-10 -5 0 5 Housing equity withdrawal average level 1990-2002 (in % of disposable income) 8
Structural factors explaining differences in housing wealth effects Easy access to mortgage financing and to financial products which facilitate equity withdrawal High rate of owner-occupation implying a wider distribution of housing wealth Low housing transaction costs and no capital gains taxes on housing wealth which liquefy housing assets 9
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 Easier access to financing strengthened the wealth effect On consumption sensitivity to changes in real house prices Contemporaneous correlation (1971-2002) Portugal Germany Effect of mortgage market completeness United Kingdom Netherlands Spain Denmark France R2 = 0.688 2 0-2 -4-6 -8 On housing equity withdrawal Housing equity withdrawal average level (in % of disposable income) since 1990 Italy Germany Spain United Kingdom Denmark France Netherlands R2 = 0.696 0.1 Italy 40 60 80 100 Synthetic indicator of mortgage market completeness -10 40 60 80 100 Synthetic indicator of mortgage market completeness 10
Other factors facilitating the access to mortgage financing LTV ratios Mortgage terms Legal protection of collateral 11
Higher rates of owner-occupation open up the housing wealth channel Per cent Share of owner-occupied housing 100 80 60 40 20 0 Germany Denmark Netherlands France Austria Finland Japan Sweden Portugal New Zealand Canada United States United Kingdom Australia Luxembourg Belgium Ireland Norway Italy Greece Spain 12
Lower transaction costs make housing assets more liquid Housing transaction costs Transaction costs for sales of medium sized houses Per cent of total price 25 Stamp duties and Value Added Tax 20 Real estate agents Other costs (legal costs, insurance, etc.) 15 10 5 0 Belgium Denmark France Germany Netherlands Norway United States 13
House prices influence residential construction activity Change in housing investment (percentage points of GDP) 8 6 IRE 4 2 0-2 JPN CAN USA SWE ITA KOR DEU CHE GBR FIN AUS ESP DNK NZL FRA NLD NOR -0.4-0.2 0 0.2 0.4 0.6 0.8-4 Change in Q ratio 14
Structural determinants of house price variability Regional differences in price to rent ratio Index, 1995 = 100 United States United States 180 California Florida Mid-Atlantic Michigan 180 160 New England Texas 160 140 140 120 120 100 100 80 1985 1990 1995 2000 2005 1985 1990 1995 2000 2005 80 Source: Office of Federal Housing Oversight for house prices and Bureau of Labor statistics for rents. 15