Housing and finance markets in Europe: their

structure and relationship to macro

economies
Christine Whitehead, London School of Economics
and Political Science
European Union
Social Situation Monitor

Seminar on Housing
Brussels
11th December, 2014

Housing and Finance Markets in Europe

The vast majority of discussion (and available data)- on
housing and finance markets relates to tenure, to
house prices and to mortgage markets;
Particularly in this century much of the interest has
concentrated on whether housing and finance markets
have adversely affected economies at the macro level,
although housing experts tend to be more interested in
the negative impact of macro- economics, and
particularly economic volatility on housing markets and
welfare;
Perhaps it is worth pointing out that in the main these
concerns are concentrated in well-housed Western
Europe, while the major social issues remain heavily
concentrated in Eastern Europe.

Severe Housing Deprivation

Tenure by Population

Ratio of Outstanding Residential Mortgage

Loans to GDP (%)
USA
Australia
Austria
Belgium
Czech Republic
Germany
France
UK
Denmark
Finland
Iceland
Ireland
Netherlands
Norway
Portugal
Slovenia
Spain
Sweden
Switzerland
Euro zone

2001

2007

2012

60
50 (2002)
14
27
2 (2002)
53
22
57
71
20
73
33
73
42
43
0.5
33
48
113 (2003)
43 (2004)

86

69
85
28
49
14
45
43
81
101
44
n/a
78
108
70
67
15
61
81
103
52

Sources: EMF/OECD

24
38
10
48
35
83
93
35
107
75
96
60
60
8
61
66
132 (2006)
49

Latest Owneroccupation rate

66 (2010)
69 (2010)
57 (2010)
78 (2007)
79 (2010)
46 (2011)
58 (2011)
65 (2011)
53 (2012)
74 (2011)
77 (2009)
70 (2011)
56 (2009)
85 (2003)
74 (2011)
78 (2009)
82 (2011)
64 (2011)
44 (est 2010)
67

Pre and Post the Financial Crisis

The general understanding is often that there was a very consistent
pattern of house price increases linked to the expansion of residential
debt across much of Europe prior to the financial crisis and that the
outcome of that crisis was also fairly consistent;
Equally a major source of the problems arose from deregulation of finance
markets and poor quality lending;
However deregulation started decades before the crisis and there remain
enormous differences within Europe with respect to both mortgage and
housing systems generating very different experiences across countries;
Moreover to the extent that there were similarities these suggest three or
even four stages rather than two - a long period of relatively stable
expansion; significant evidence of bubbles in some countries from early
2000s; differential impacts of the financial crisis on house prices; followed
by very different experiences, especially post 2010;
In Eastern Europe most countries have not been affected specifically by
the housing finance issues to anything like the same degree - except
Hungary and to a lesser extent Poland particularly because of FX loans.
They have of course been affected by the subsequent recession.

Real House Prices (seasonally adjusted, index based in 2010)

1995-2010, Quarterly
160.00

140.00

120.00

100.00

Great Britain Real House

Prices
80.00

Ireland Real House Prices

Denmark Real House Prices

60.00

Spain Real House Prices

40.00

The Netherlands Real House

Prices

20.00

2009:3

2009:1

2008:3

2008:1

2007:3

2007:1

2006:3

2006:1

2005:3

2005:1

2004:3

2004:1

2003:3

2003:1

2002:3

2002:1

2001:3

2001:1

2000:3

2000:1

1999:3

1999:1

1998:3

1998:1

1997:3

1997:1

1996:3

1996:1

1995:3

1995:1

0.00

Real House Prices (seasonally adjusted, index based in 2010)

1995-2010, Quarterly
120.00

100.00

80.00

Sweden Real House Prices

60.00

Finland Real House Prices

France Real House Prices
40.00

20.00

2009:3

2009:1

2008:3

2008:1

2007:3

2007:1

2006:3

2006:1

2005:3

2005:1

2004:3

2004:1

2003:3

2003:1

2002:3

2002:1

2001:3

2001:1

2000:3

2000:1

1999:3

1999:1

1998:3

1998:1

1997:3

1997:1

1996:3

1996:1

1995:3

1995:1

0.00

2009:3

2009:1

2008:3

2008:1

2007:3

2007:1

2006:3

2006:1

2005:3

2005:1

2004:3

2004:1

2003:3

2003:1

2002:3

2002:1

2001:3

2001:1

2000:3

2000:1

1999:3

1999:1

1998:3

1998:1

1997:3

1997:1

1996:3

1996:1

1995:3

1995:1

Real House Prices (seasonally adjusted, index based in 2010)

1995-2010, Quarterly

120.00

100.00

80.00

60.00
Belgium Real House Prices

Norway Real House Prices

40.00

20.00

0.00

2009:3

2009:1

2008:3

2008:1

2007:3

2007:1

2006:3

2006:1

2005:3

2005:1

2004:3

2004:1

2003:3

2003:1

2002:3

2002:1

2001:3

2001:1

2000:3

2000:1

1999:3

1999:1

1998:3

1998:1

1997:3

1997:1

1996:3

1996:1

1995:3

1995:1

Real House Prices (seasonally adjusted, index based in 2010)

1995-2010, Quarterly

140.00

120.00

100.00

80.00
Germany Real House Prices

60.00
Switzerland Real House Prices

40.00

20.00

0.00

Real House Prices (seasonally adjusted, index based in 2010)

2010-2014, Quarterly

120.00

100.00

80.00

Ireland Real House Prices

60.00

Spain Real House Prices

Italy Real House Prices

40.00

20.00

0.00

The Netherlands Real House Prices

Real House Prices (seasonally adjusted, index based in 2010)

2010-2014, Quarterly
108.00
106.00
104.00
102.00
100.00
98.00

Great Britain Real House Prices

France Real House Prices

96.00
94.00
92.00
90.00
88.00

Belgium Real House Prices

Real House Prices (seasonally adjusted, index based in 2010)

2010-2014, Quarterly
140.00

120.00

100.00

80.00
Germany Real House Prices
60.00

Switzerland Real House Prices

Norway Real House Prices
Sweden Real House Prices

40.00

20.00

0.00

1995:1
1995:3
1996:1
1996:3
1997:1
1997:3
1998:1
1998:3
1999:1
1999:3
2000:1
2000:3
2001:1
2001:3
2002:1
2002:3
2003:1
2003:3
2004:1
2004:3
2005:1
2005:3
2006:1
2006:3
2007:1
2007:3
2008:1
2008:3
2009:1
2009:3
2010:1
2010:3
2011:1
2011:3
2012:1
2012:3
2013:1
2013:3
2014:1
2014:3

Nominal and Real House Prices (seasonally adjusted, index based in 2010)
1995-2014, Quarterly, Great Britain and Germany

140

120

100

80
Great Britain Nominal Price

60
Great Britain Real Price

Germany Nominal Price

Germany Real Price

40

20

Issues arising from the Financial Crisis

The expectation among economies with high household debt and open economies was that
there would be large scale mortgage default and problems of negative equity and
possessions (as in the early 1990s);
In the main this did not happen, significantly because of lower interest rates and variable rate
mortgages but also because unemployment did not rise as expected;
Major exceptions include Iceland, Ireland, and Spain not only because of the depth of their
crises but also because of high supply elasticities, massive overhangs of new supply and the
proportion of their real economies involved in the construction sector;
The biggest finance problems were with respect to the banking sector and often on the
Treasury management side with high exposure to lending to residential development rather
than directly related to mortgage market failure;
However there have been large reductions in access to mortgage finance resulting in low
levels of transactions and the exclusion of new entrants from the owner-occupied market;
One result has been less downward adjustment in house prices in many countries than
expected or probably desirable and now considerable evidence of rising house prices even
though economies are stagnating or growing very slowly;
Particular issues of increasing differentiation within countries with house price rises
concentrated in areas of housing pressure.

Most Important Effect: Lack of Investment?

While, for many European countries, the financial markets have worked better
than feared, the biggest continuing problem is that investment levels have fallen
drastically across much of Europe; construction industries have been destroyed;
debt finance for investment remain a major problem and risks are still seen to be
too high;
The recession that followed the financial crisis has been longer lasting and
government policies to stimulate investment have been replaced by greater
austerity measures;
What upturn there has been has been extremely slow many countries do not
expect to get back to normal levels of investment for many years;
Where there is expansion bottlenecks are occurring rapidly and much of any
increased demand is coming out in higher prices;
The housing situation for consumers is being worsened by mortgage market
regulatory responses which are making it more difficult for households to enter
owner-occupation in most European countries often excluding households that
could afford to buy over their lifetimes;
Increasing importance of private rental markets and increasing concerns about
high rents and calls for additional regulation but equally a desire to bring in more
equity finance for the rental market.

Housing Completions (000s)

)
2001
Source: EMF

2007

2012

Year with
highest/lowest
output levels

Completions
per 000
population
over 18,
2007

1,571

1,502

649

2006/2012

6.7

40

46

42

2006/2010

6.8

Belgium (starts) 42

55

42

2006/2002

6.5

Czech Republic
Germany
France (starts)
UK
Denmark
Finland
Iceland
Ireland
Netherlands
Norway
Portugal
Slovenia
Spain
Sweden

42
211
435
234
25
30
3
78
80
30
67
8
641
31

29
215
304
136
10
28
1
9
58 (2011)
19 (2011)
23
4
120
26

2007/2001
2001/2009
2007/2009
2007/2009
2006/2009
2005/2009
2007/2011
2005/2012
2009/2010
2007/2010
2002/2012
2008/2012
2007/2012
2008/2010

9.8
3.1
8.7
4.8
5.8
7.1
12.8
23.5
6.2
8.2
7.6
4.7
17.3

USA
Austria
(building
permits)

25
326
303
192
21
27
2
53
73
22
115
7
366
15

Residential investment, share of nominal GDP

Conclusions Moving towards greater stability?

There is still massive concern at the macro level about the possibility that housing
and construction more generally will knock economies off course and undermine
stable economic growth;
There is further concern that deleveraging has not significantly increased resilience
and that rising interest rates could be difficult to manage
But at the macro level there remains relatively little understanding of how
property markets operate and how interventions may play out
Governments tend to place heavy reliance on banking capital ratios and limiting
loan to value ratios as well as on increased regulation - but do these address the
fundamentals?
An important result in many countries is that the gulf between the haves and the
have nots is increasing. Those already well housed have suffered little from either
the financial crisis or the lack of investment; those trying to enter the housing
market are finding it increasingly difficult with potential negative impacts on
labour markets;
But perhaps the most important conclusion is that there is very little evidence that
housing and finance systems are working better or that government interventions
are significantly improving efficiencies
We are nowhere near a long run stable equilibrium and unlikely to be so in the
forseeable future.