jones (ed.) - challenges of the housing economy; and international perspectives (2012)

5 The Changing Nature of Household Demand Edward C Y Yiu and Sherry Y S Xu Conclusions 105 6 Structural Sustainability of Homeownership Judith Yates Future projections of homeownership s

Housing Economy

Edited by

Colin Jones

Professor of Estate ManagementInstitute for Housing, Urban and Real Estate ResearchHeriot-Watt University

Michael White

Professor of Real Estate EconomicsSchool of Architecture, Design and the BuiltEnvironment

Nottingham Trent University

Neil Dunse

Reader in Urban StudiesInstitute for Housing, Urban and Real Estate ResearchHeriot-Watt University

Housing Economy

An International Perspective

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Library of Congress Cataloging-in-Publication Data

Challenges of the housing economy : an international perspective / [compiled by]

Colin Jones, Michael White, Neil Dunse.

p cm.

Conference proceedings.

Includes bibliographical references and index.

ISBN 978-0-470-67233-4 (hardcover : alk paper)

1 Housing–Prices–Congresses 2 Real estate business–Congresses

3 Real property–Ownership–Congresses 4 Global Financial Crisis, 2008–2009–Congresses

5 Housing policy–Congresses I Jones, Colin II White, Michael III Dunse, Neil

HD7286.C43 2012

333.3–dc23

2011045311

A catalogue record for this book is available from the British Library.

Set in 10/13pt TrumpMediaeval by SPi Publisher Services, Pondicherry, India

1 2012

The chapters of this book are selected from papers presented at a symposium organised by the editors and generously funded by the Royal Institution of Chartered Surveyors (RICS) and held in September 2010 in Edinburgh

It  brought together a small number of experts from around the world to examine recent housing market trends and to share international experiences and policies There were a number of interrelated themes: the challenges faced by policy makers following the post-credit crunch world and the impli-cations for households, construction, the housing market and the economy

Twelve papers have been selected for this volume from the original one, to create a focused but comprehensive analysis of these themes and also

twenty-to provide a worldwide perspective We are grateful twenty-to the other participants for their comments on the original papers

promoting best practice, regulation and consumer protection for business and the community It is the home of property related knowledge and is an impartial advisor to governments and global organisations It is committed to the promotion

of research in support of the efficient and tive operation of land and property markets worldwide

effec-Real Estate Issues

Series Managing Editors

Clare Eriksson Head of Research, Royal Institution of Chartered

Surveyors

John Henneberry Department of Town & Regional Planning, University

of Sheffield

K.W Chau Chair Professor, Department of Real Estate and

Construction, The University of Hong Kong

Elaine Worzala Director of The Richard H Pennell Center for Real

Estate Development, Clemson University

Real Estate Issues is an international book series presenting the latest

thinking into how real estate markets operate The books have a strong

theoretical basis – providing the underpinning for the development of

new ideas

The books are inclusive in nature, drawing both upon established

tech-niques for real estate market analysis and on those from other academic

disciplines as appropriate The series embraces a comparative approach,

allowing theory and practice to be put forward and tested for their

applica-bility and relevance to the understanding of new situations It does not seek

to impose solutions, but rather provides a more effective means by which

solutions can be found It will not make any presumptions as to the

importance of real estate markets but will uncover and present, through

the  clarity of the thinking, the real signifi cance of the operation of real

estate markets

Greenfields, Brownfields & Housing Development

Adams & Watkins 9780632063871

Planning, Public Policy & Property Markets

Adams, Watkins & White 9781405124300

Housing & Welfare in Southern Europe

Allen, Barlow, Léal, Maloutas & Padovani 9781405103077

Markets & Institutions in Real Estate & Construction

Ball 9781405110990

Building Cycles: Growth & Instability

Barras 9781405130011

Neighbourhood Renewal & Housing Markets: Community Engagement

in the US and UK

Beider 9781405134101

Mortgage Markets Worldwide

Ben-Shahar, Leung & Ong 9781405132107

The Cost of Land Use Decisions: Applying Transaction Cost Economics to

Planning & Development

Buitelaar 9781405151238

Urban Regeneration & Social Sustainability: Best Practice from European Cities

Colantonio & Dixon 9781405194198

Urban Regeneration in Europe

Couch, Fraser & Percy 9780632058419

Urban Sprawl in Europe: Landscapes, Land-Use Change & Policy

Couch, Leontidou & Petschel-Held 9781405139175

Transforming Private Landlords

Crook & Kemp 9781405184151

Real Estate & the New Economy:

The Impact of Information and Communications Technology

Dixon, McAllister, Marston & Snow 9781405117784

Economics & Land Use Planning

Evans 9781405118613

Economics, Real Estate &

the Supply of Land

Evans 9781405118620

Management of Privatised Housing:

International Policies & Practice

Gruis, Tsenkova & Nieboer 9781405181884

Development & Developers: Perspectives

Housing Markets & Planning Policy

Jones & Watkins 9781405175203

Office Markets & Public Policy

Jones & White 9781405199766

Challenges of the Housing Economy

Jones, White & Dunse 978047062334

Mass Appraisal Methods: An International Perspective for Property Valuers

Kauko & d’Amato 9781405180979

Economics of the Mortgage Market:

Perspectives on Household Decision Making

Leece 9781405114615

Towers of Capital: Office Markets &

International Financial Services

Lizieri 9781405156721

Making Housing More Affordable: The Role

of Intermediate Tenures

Monk & Whitehead 9781405147149

Global Trends in Real Estate Finance

Newell & Sieracki 9781405151283

Housing Economics & Public Policy

O’Sullivan & Gibb 9780632064618

International Real Estate: An Institutional Approach

Seabrooke, Kent & How 9781405103084

Urban Design in the Real Estate Development Process

Tiesdell & Adams 9781405192194

Real Estate Finance in the New Economic World: Development of Deregulation and Internationalisation

Tiwari & White 9781405158718

British Housebuilders: History & Analysis

Wellings 9781405149181

Contributors xiii

Colin Jones

Summary 23

Harry W Richardson, Gordon F Mulligan and John L Carruthers

Conclusion 44

3 Housing Bubbles and Foreclosures that Follow:

Craig A Depken II, Harris Hollans and Steve Swidler

4 Unemployment Risk, Homeownership and Housing Wealth:

Yoko Moriizumi and Michio Naoi

Conclusion 81

5 The Changing Nature of Household Demand

Edward C Y Yiu and Sherry Y S Xu

Conclusions 105

6 Structural Sustainability of Homeownership

Judith Yates

Future projections of homeownership sustainability 119

Conclusions 126

7 Impacts on Wealth and Debt of Changes in the Danish

Jens Lunde

Dynamics of recent Danish housing market cycles 130

Financial stability of owner-occupied households 140

Conclusions 151

8 Market Stability, Housing Finance and Homeownership

Peter Westerheide

German housing price trends: an

The impact of the fi nancial crisis on the German

High down-payment constraints and stability:

contradicting aims? The role of savings behaviour 164

9 The Responsiveness of New Supply to House Prices:

Paloma Taltavull de La Paz

Spanish housing market cycle pre and post the

Estimation of the supply elasticity of new houses 179

10 The UK Housing Market Cycle and the Role

of Planning: The Policy Challenge Following

Colin Jones

The planning policy consequences of the

Background to the current Scottish affordability challenge 239

13 The Private Rented Sector As a Source

Michael Ball

The private rented sector within the housing system 256

Colin Jones

Michael Ball is Professor of Urban and Property Economics in the School of

Real Estate and Planning, Henley Business School, University of Reading

His books include Markets and Institutions in Real Estate and Construction (2006) and the co-author of the textbook, The Economics of Commercial Property Markets (1998) He jointly chairs the housing economics group of

the European Network for Housing Research; and led the expert advisory panel on housing markets and planning for the UK government’s Communities and Local Government department from 2007–2010 He authors the annual

European Housing Review for the Royal Institution of Chartered Surveyors

John L Carruthers is the Director of the Urban Sustainability Program at

George Washington University in Washington, DC He was formerly a Senior Economist in the US Department of Housing and Urban Development

Craig A Depken II received his PhD in economics from the University of

Georgia and has held tenured positions at the University of Texas at Arlington and the University of North Carolina at Charlotte His research areas include industrial organisation, sports economics, real estate, and public choice He has served on the editorial boards of several journals and

as co-editor of Contemporary Economic Policy

Neil Dunse is a Reader in Urban Studies in the Institute for Housing, Urban

and Real Estate Research at Heriot-Watt University, Edinburgh He received his PhD from the University of Paisley and was formerly a senior lecturer at the University of Aberdeen His research interests are in housing and com-mercial real estate economics focusing on office submarkets, valuation accuracy, market adjustment processes over time, obsolescence and housing

density and planning policy Recent articles have appeared in Urban Studies, Real Estate Economics, Journal of European Real Estate Research and Journal of Property Research, among others.

Kenneth Gibb is Professor of Housing Economics at the University of

Glasgow Kenneth is editor-in-chief of Urban Studies and a non-executive

director of Sanctuary Housing Association His principal areas of research concern the economic treatment of social housing, the application of

be havioural economics to housing questions, the economics of housing

policy and applied market analysis He recently co-edited Housing Economics,

a fi ve volume reader published by SAGE (with Alex Marsh) and the SAGE Handbook of Housing (co-edited with David Clapham and William Clark).

Harris Hollans received his PhD in Real Estate from the University of

Georgia He is currently an Associate Professor in the Department of Finance

at Auburn University Prior to beginning his academic career he held

vari-ous senior level positions in the fi eld of commercial real estate valuation

and consulting His professional credentials include membership in the

Appraisal Institute, with whom he holds the MAI designation His research

interests include real estate market cycles and the fi nancial regulatory

structure and its impact on real property markets

Colin Jones is Professor of Estate Management in the Institute for Housing,

Urban and Real Estate Research at Heriot-Watt University, Edinburgh

He  has held academic positions formerly at the universities of Glasgow,

Manchester and Paisley Colin’s research interests span housing, urban and

commercial real estate economics He has undertaken a range of projects for

the UK and Scottish governments including a review of regulation and redress

in the UK housing market (2009) His books include the Right to Buy (2006),

Housing Markets and Planning Policy (2009) and (co-editor) Dimensions of

the Sustainable City (2010)

Jens Lunde is Associate Professor in the Department of Finance at

Copenhagen Business School and has specialised in the area of housing

economics and fi nance Prior to this he started his carrier at the Danish

Building Research Institute and later in the planning office at the Ministry

of Housing He has published widely in the different fi elds of housing

eco-nomics, fi nance and policy Jens has researched extensively on the taxation

of the private ownership of housing, owner-occupiers’ capital structure and

debt, tenure neutrality, the special Danish private co-operative tenure and

mortgage loans

Yoko Moriizumi is a Professor at the Department of Economics in Kanagawa

University Her research interests include housing fi nance, portfolio choices

by homeowners, and tenure choice and housing demand Recently she has

become particularly interested in the international comparison of mortgage

choice

Gordon F Mulligan is Emeritus Professor in the Department of Geography

and Regional Development at the University of Arizona, Tucson

Michio Naoi received his PhD from Keio University and is currently

Assistant Professor at the Tokyo University of Marine Science and

Technology His research interests include tenure choice and housing

demand; house price dynamics; and housing market regulation and

insti-tutions Recent articles have appeared in Regional Science and Urban

Economics, Journal of Real Estate Finance and Economics, and Journal of Property Research, among others.

Harry W Richardson holds the James Irvine Chair of Urban and Regional

Planning in the School of Policy, Planning and Development at the University

of Southern California, Los Angeles

Paloma Taltavull de La Paz received her PhD from the University of Alicante

She is senior lecturer in applied economics and researcher in the International Economic Institute at the University of Alicante Her research interests are housing market and real estate economics, as well as Spanish and European eco-nomics Paloma’s latest research is focused on housing supply determinants, price formation and demand analysis in Spanish housing markets Another area

of interest is the development of European real estate education initiatives

Steve Swidler received his Ph.D from Brown University and is currently the

J Stanley Mackin Professor of Finance at Auburn University He is a recent Fulbright Scholar and former fi nancial economist with the Office of the Comptroller of the Currency in Washington, D.C His research interests include economic cycles in the housing market, managing house price risk, and more generally, empirical studies in derivative markets

Peter Westerheide studied economics at Witten/Herdecke University and

received his doctoral degree from the University of Muenster From 1999 to August 2011 he was researcher/senior researcher at the Centre for European Economic Research (ZEW) in Mannheim His main fi elds of research addressed the areas of real estate markets analysis and real estate markets

fi nance, private old age pension funding, saving behaviour, as well as rate fi nancing Peter was also coordinator of the Leibniz-Network “Real Estate and Capital Markets” (ReCapNet) Since September 2011 he is chief economist of BASF SE, the world largest chemical company

corpo-Michael White received his PhD from the University of Aberdeen and is

now Professor of Real Estate Economics at Nottingham Trent University

His research interests are in housing and commercial real estate economics focusing on market adjustment processes over time, spatial interactions across locations, and the separation of long and short run infl uences on mar-ket behaviour His work has analysed issues relating to housing affordability for government bodies, investment performance for private institutions, and policy and market interaction for quasi government institutions

Christine M E Whitehead is Professor in Housing in the Department of

Economics, London School of Economics and Senior Research Fellow at the

Cambridge Centre for Housing and Planning Research, University of

Cambridge She has conducted extensive research on the housing market,

with special reference to housing fi nance and subsidies, social housing

provision and land use planning, as well as on urban, industrial policy and

privatisation issues.  Major themes in her recent research have included

analysis of the relationship between planning and housing; housing needs

assessments; the role and fi nancing of social housing and privately rented

housing in the UK and Europe

Sherry Y S Xu is a PhD student at the Department of Real Estate and

Construction, the University of Hong Kong (HKU).  Her research interests

include macro analysis of real estate markets and real estate fi nance

includ-ing REITs.  Sherry’s research focus includes Hong Kong, China, USA and

Australia

Judith Yates is currently an Honorary Associate in the School of Economics

at the University of Sydney after a long career in academia Her research has

been in the fi elds of housing economics, fi nance and policy and, in the past

few years, has focused on various aspects of housing affordability She has

served on numerous government advisory committees and boards and is

currently a member of the government’s National Housing Supply Council. 

She holds a Doctor of Economic Science from the University of Amsterdam

and a Bachelor of Economics (hons) from the Australian National University. 

Edward C Y Yiu received his PhD from the University of Hong Kong (HKU)

and is now an Assistant Professor at the Department of Real Estate and

Construction, the University of Hong Kong.  His research interests include

macro and micro-analyses of housing markets, real estate economics and

fi nance, and urban economics.  He has recently carried out a study on the

effects of socio-economic, demographic and mobility changes on housing

price gradient changes between Hong Kong and Macau, funded by the

Research Grants Council of Hong Kong.  He is currently extending the study

to China housing markets

Basel III The Basel international agreements relate to common global

standards of capital adequacy and liquidity rules for banks These were fi rst introduced in 1988 Basel III signifi cantly increases the amount of equity capital that banks are required to have from 2013

Case-Shiller Index This is the gold standard of house prices in the USA

It provides a month-to-month measure of house prices that started in

1987 The S&P/Case-Shiller Home Price Indices are resale measures for the USA tracking changes in the value of real estate, both nationally and

in 20 metropolitan regions It is based on actual sales, and widely cised in Standard & Poors outlets For further information see: http://

publi-www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/

en/us/?indexId=spusa-cashpidff–p-us––

CDO A ‘collateralised debt obligation’ is a marketable investment

secu-rity backed by a pool of bonds, loans (not necessarily mortgages) and other assets, that can be bought and sold on international capital markets CDOs are therefore a general class of securities

Covered Bonds A covered bond is a specifi c form of CDO and enables the

investor to have a ‘dual’ credit claim Residential mortgage-backed ties are supported by the particular pool of mortgages However, the covered bond holder is backed not just by the pool of (mortgage) assets but also by the issuer This means that the bond holder has greater protection Covered bonds have been used to a great extent in European countries such as Denmark, Spain and Germany

securi-Fannie Mae securi-Fannie Mae is a US government sponsored enterprise originally

set up in 1938 It operates in the ‘secondary mortgage market’ to increase the funds available for mortgage lenders to issue loans to home buyers

It  buys up and pools mortgages that are insured by the Federal Housing Administration (see below) It fi nances this by issuing mortgage-backed debt securities in the domestic and international capital markets

FHA The Federal Housing Administration is a US government agency

created in 1934 It insures loans made by banks and other private lenders for home building and home buying

Freddie Mac Freddie Mac is a US government sponsored enterprise

established in 1970 to provide competition to Fannie Mae and operates in

the same way

GHLC Government Housing Loan Corporation (of Japan) was established

in 1950 to ensure stable housing fi nance to support new house building and

to improve the standard of stock destroyed and devastated by Wold War II

It  was an independent government agency that issued mortgages at low

fi xed rates of interest GHLC had a large market share but from 2002 the

government began phasing out subsidised mortgages The agency was

replaced by the Japan Housing Finance Agency in 2007 with a different primary

role of securitising mortgages from private banks, although securitisation

had begun under the GHLC

OECD The Organisation for Economic Cooperation and Development

(OECD) comprises a group of 34 countries that includes all western countries

It was set up in 1961 to promote policies that improve economic and social

well-being in the world

Challenges of the Housing Economy: An International Perspective, First Edition

Edited by Colin Jones, Michael White and Neil Dunse.

© 2012 John Wiley & Sons, Ltd Published 2012 by John Wiley & Sons, Ltd.

The world is still trying to adjust to the international banking crisis of 2007 that wrought recession and a dramatic downturn in housing markets across much of the globe, followed by a fi scal crisis in many countries that has yet

to be fully resolved The consequences for national housing markets have varied dependent on the specifi cs of their housing system, the point in the economic cycle and the exposure to the banking collapses This book exam-ines the different experiences of countries in Europe, Australasia and the USA and draws out the challenges to housing markets in the short and long term

The credit crunch and its aftermath has also emphasised the importance

of the housing market to the economy The relationship between the ing market and the economy has always stimulated debate but it has recently

hous-risen to greater prominence as special editions of Journal of Housing Economics (13.4) and the Oxford Review of Economic Policy (24.1) bear wit-

ness In the latter volume, Muellbauer and Murphy (2008) offer a survey of the multiple interactions between the housing market and the economy but they leave many questions unanswered The events at the end of the last

decade have given this issue even more momentum as Gabriel et al (2009)

note, writing about the position in the USA, ‘The far-reaching economic and social consequences of the housing crisis require nothing less than the wholesale evaluation and redesign of housing policy, regulation, and the

This introduction begins by illustrating the scale of the impact by

reference to the extreme example of Ireland It then sets out a statistical

overview of international housing market trends over the past four decades

by examining price cycles to provide a context for the book These trends

demonstrate that the links between the macroeconomy and the housing

market vary between countries (Meen, 2002a, Demary, 2009) The next

section reviews the fundamental dynamics of the housing market and the

importance of tenure institutional structures and market parameters in

each country The following section highlights the relationship between the

housing market and the economy The chapter then outlines the origins and

impact of the recent fi nancial crisis on house prices in individual countries

The contents of the remaining chapters are then described explaining which

aspects of the housing economy and market cycles are highlighted in the

different countries studied

The Irish example

The Republic of Ireland is an extreme example yet its experience is

instructive as a magnifi cation what happened in many countries During a

decade-long economic resurgence from the mid 1990s, recognised by the

term ‘Celtic Tiger’, per capita incomes in Ireland rose dramatically and the

population increased by 17% With no property tax, income taxes and

interest rates falling, and the liberalisation of mortgage fi nance making it

readily available, a housing market boom was generated which saw prices

roughly quadruple to their peak at the end of 2006 (ESRI, 2011) In the

process mortgage debt per capita more than doubled supported by easier

access to international fi nance for Irish banks and foreign banks entering

the market (Norris and Winston, 2011)

Following the credit crunch, house prices fell by 38% from the end of

2006 to 2010 (ESRI, 2011) The parallel problems in the commercial property

market, together with the collapse of the housing market, contributed to the

subsequent collapse of the banking system and a bailout by the Irish

government This in turn led to a fi scal crisis, and the Irish government

needed to be sustained by a bailout of €85bn in November 2010 by the other

European governments and the IMF The internal political fallout from

these events led to a successful vote of no confi dence in the government and

a general election that returned the opposition Further afi eld it has

contributed to uncertainties on the international fi nancial markets about

the future of the euro currency

Beyond these headlines the impacts on the Irish housing system were

more subtle Historically the homeownership level was high in Ireland

refl ecting both low house prices and that it was the normal tenure in rural

areas The boom priced out low-income households, particularly in urban areas, who had to look to the private rented sector while there was an increased concentration of high housing debt among successful young fi rst-time buyers The downturn has hit this latter group worst with negative equity but they also tend to be relatively affluent, while older home owners, who represent a broad range of incomes and largely own outright, have also suffered capital losses (Norris and Winston, 2011).

The full consequences of the credit crunch for the housing market in Ireland, as in other countries, have yet to fully work their way out, and that  continues to create uncertainty The recession in the house market has  focused even more public attention on house prices and their future prospects Their prominence refl ects the importance of the housing market

to household decision making and to the economy With owner occupation the dominant tenure around the world such household pressures will have been felt in most countries The inevitable and unanswered questions for which many are searching is where are these trends taking us and when (and if) the upturn will arrive

International historical housing market context

In the UK, where monitoring the housing market has become a national obsession since the credit crunch, newspapers have periodically and enthusiastically reported negative forecasts, by prophets of doom, of dramatic falls in house prices These conclusions are normally based on a return to a market price level associated with house-price-to-income ratios last seen just after the millennium It is a simple analysis, and a message that dampens market expectations and plays on fears about the fragility of the housing market and household wealth bound up in a home The theoretical basis of these reports is questionable as they consider only one linkage of the complex forces that shape the housing market and its dynamics It does not draw on the experiences of the many other countries that have been similarly infl uenced by the global downturn, or at least only those that are consistent with their message Similar national parochial analyses are being repeated in other countries

It is important to remember that homeownership is effectively treated distinctively in different cultures with implications for how housing markets work and trends in house prices For example, in southern European countries households rarely move from their home, which is often purchased with the help of the family Often several generations live together under the same roof In contrast, in many Anglo-Saxon countries owner occupiers have sought to purchase at an early age, and move to adjust their housing requirements through the family life cycle so there is a much more active

housing market It is interesting to note that rising unaffordability,

particularly in the latter stages of the last property boom, led, as the book

chapters show, not only to a rise in the age of fi rst home purchase in many

countries but also a move towards a return to several generations living

together Furthermore, in the UK fi rst time purchasers increasingly received

fi nancial support from parents to raise the deposit A national survey by the

Alliance and Leicester (2007) at the time found that parents were paying on

average £21,314 to help their children get on the property ladder,

One of the major motivations for this book is to take an international

perspective on the short-term impact of the fi nancial crisis on the housing

market and review the reasons for differences between countries To gain

some initial understanding on the current housing market it is useful to

begin by taking an overview of long-term trends worldwide by reference to

OECD house price data (it excludes some major economies such as China)

Some care should be taken in the comparison of this data as they are

con-structed in different ways and as a result they can be biased, for example

towards certain segments of the market (Eiglsperger, 2010) This issue is

also discussed for the particular case of Germany in chapter 7 In the

analy-sis below our interest is just to establish a broad overview

A useful way to compare international housing market experiences is to

focus on the different cycles of countries Table 1.1 reports on major upturns

and downturns in real prices since 1970 for selected countries André (2010)

defi nes major cycles in the housing market as real house price changes of at

least 15% within some of the largest economies and ignores more modest

upward and downward adjustments Judged by this table, the UK housing

market is the most volatile followed by Spain, Italy and Denmark Although

not reported in the table, Finland and Sweden show a similar volatility to

Denmark albeit the cycles are different Many countries experienced signifi

-cant upturns in the housing market at the beginning of the 1970s In the

case of France the house price boom lasted most of the decade but for Italy,

the UK and Japan the tripling of oil prices in 1973 and the recession

that  followed was mirrored in a downturn in house prices that lasted up to

four years

The beginning of the 1980s saw a divergence of house price trends into

two camps In much of continental Europe real house prices fell

substan-tially – Germany, France, the Netherlands, Spain and Italy (as well as Ireland,

Sweden and Canada) – for the fi rst half of the decade if not longer before

showing dramatic growth in the latter part of the decade (Germany excepted)

In contrast the early 1980s saw the beginning of substantial upturns in real

prices in Finland, Denmark, the UK and the USA These upswings (with the

exceptions of Norway and Denmark) lasted most of the 1980s

This almost universal (in terms of OECD countries) house price boom of

the (later) 1980s falls away around the end of the decade, and the beginning

of the 1990s saw a period of modest negative price adjustment for most countries In the case of France, Finland, Italy, Spain, Switzerland and the

UK substantial downturns lasted approximately six years A new signifi cant upturn emerged for most OECD countries in the middle of the decade, some earlier (Ireland 1992 and Scandinavian countries 1993) and others later (Canada 1998, Italy 1998, New Zealand 1998 and Switzerland 2000) For virtually all these countries the house price continued until a sudden end with the credit crunch

These long upward movements in house prices were not only the longest

in recent times but also led to the doubling of real prices in some countries

Yet despite the longevity of the upswing there was considerable variance in the scale of the upturn At one extreme the highest real increases were

Table 1.1 Real house price cycles in selected countries.

Duration (quarters)

%

Duration (quarters)

% Change

* represents downturns which were continuing at end of 2010.

Source: OECD quarterly house prices data.

Ireland 302%, Norway 199%, Denmark 174% and the UK 173% On the

other hand, the US and Canadian real rises were only 56% and 72% while in

Switzerland it was only 20% although it was not affected by the latest

downturn There were also mini-cycles within the long upswing with

periods when prices surged and other periods when prices plateaued

There are a mass of micro-detail differences between countries of which

the above commentary has only begun to scratch the surface Nevertheless

the review emphasises the important role and scale of cycles in the housing

market It also establishes a degree of commonality especially in the past

15 years of the cycles, refl ecting the signifi cance and impact of globalisation

Yet there is sufficient variation to demonstrate the importance of national

factors There are countries that stand out in different ways Australia has

not had a signifi cant downturn in real house prices over the whole 40-year

period, while the USA suffered its fi rst substantive collapse of prices in

living memory after the credit crunch

Japan has perhaps the most distinctive pattern of real house prices with

long upswings and downswings First, house prises rose by 57% in real terms

between 1970 and 1974 in just 15 quarters Then after a downward

adjustment over the next three years of 31%, rising by 77% through

54  quarters, almost 14 years, from 1977 until 1991 This is followed by

almost two decades of prices declining in total by over half in real terms

over the period to the present day Germany too suffered a long downward

movement in real house prices from 1994 to 2008 which saw a real fall of

26.5% when most European cities were living through a strong housing

market The Netherlands in contrast has the reverse experience with real

prices consistently rising over a 23-year period from 1985 to 2008 by 233%

Dynamics of the housing market

A key infl uence on these house price cycles is the business cycle of the

individual country with peaks in the two cycles broadly coinciding (Aherne

et al., 2005, André, 2010) This is not always true as the Netherlands

illustrates The long expansionary phase of house prices around the world

culminating in the credit crunch also continued through the relatively

shallow macroeconomic downturn in many countries around the

millennium This period of expansion is also signifi cant in proportional

terms with real prices approximately doubling that experienced in previous

upturns in most countries The exceptions are Finland and Spain in the

1980s when there were particular individual economic circumstances that

contributed to dramatic growth (André, 2010)

A rise in real house prices can normally be partly attributed to a period of

(initially) relatively low interest rates, and be associated with ease of

mortgage fi nance and a growth in real incomes (Adams and Fuss, 2010) The increasing availability of mortgage fi nance often coincides with deregulation

of banking systems and increased competition between banks Signifi cant deregulation of mortgage fi nance began in the early 1980s, and by 1990 most constraints in the industrialised world had been lifted, supporting a major

stimulus to national housing markets in that decade (Ahearne et al., 2005)

The latest upswing in prices was associated with the introduction of more

fl exible mortgage products with more relaxed loan-to-value ratios and longer terms available (Scanlon and Whitehead, 2004)

Housing market trends can also be attributed to and be shaped by term factors which will vary nationally rather than just these short-term macroeconomic forces The availability of mortgage fi nance varies across countries causing variations in response to interest rate changes (Kasparova and White, 2001) Demographic trends through the age structure of the population, the rate of household formation and migration can have an important infl uence on demand, as the Irish example illustrates (although this is also a function of long-term economic prospects) House price trends over time are infl uenced by the supply response which in turn is a function

long-of the land-use planning constraints and the economics long-of the house ing industry Barker (2003, 2004) has highlighted the importance of this issue in the UK relative to other countries Jones and Watkins (2009) chroni-cle how the weak supply response in the noughties contributed to house price increases in every region of UK However, in other countries with weak planning system there is the potential for overbuilding with conse-quences for the investment attributes of housing

build-Different tenure structures in countries may infl uence the relationships between the housing market and the economy Owner occupation and rent-ing are substitutes, and the interaction between these sectors can impact on market changes as the following examples illustrate House price trends infl uence the relative attractiveness of different tenures A private rented sector comprising a high proportion of landlords with high debt gearing is potentially very susceptible to housing market downturns and likely to amplify price cycles Long-term tenants are likely to respond differently to house price cycles from short-term transient tenants who are saving to get access to the owner occupied sector The degree of low-income owner occupation may be an important factor through its impact on house price volatility and hence the attractiveness of homeownership as an investment (Westerheide, 2009)

Tenure systems in different countries are partly a policy variable as the role of the state is crucial and bound up in the realms of political economy

They are linked directly to housing policy including any rent controls/

regulation, the scale and allocation of social housing and welfare payments

Kemeny (2005), for example, distinguishes between the dual rental markets

of Anglo-Saxon countries and the unitary rental markets of some European

countries dependent directly on government policies and social values

(Hulse et al., 2010) In fact the infl uence of housing fi nance systems and

subsidies/taxation on national patterns of homeownership and renting is a

complex issue Wolswijk (2010) gives a summary of the diverse taxing of

housing in the EU including taxes on imputed rent and capital gains, the

deduction of mortgage interest against tax and VAT on new housing

Table 1.2 illustrates the tenure patterns of selected cities and demonstrates

the scale of variation between countries With the exception of Germany

the majority tenure is owner occupation but there are differences in the

split between the proportions of social housing and private rented sectors

Social housing is important in many northern European countries although

its role is in decline through sales to sitting tenants, and these fi gures

exaggerate its current position (Jones and Murie, 2006) In many countries

such as the USA social housing has been seen simply as welfare housing

and  is therefore on a very limited scale (Harloe, 1995) These countries

have a long-established private rented sector that represents a substantial

pro portion of the stock

Signifi cant changes in the long-term social policy and fi nancial parameters

of the housing market can impact on private housing market decisions

abruptly but usually take some time The turning points in house price

cycles are almost always associated with the fundamentals of the economy,

namely interest rates and real incomes Downturns in housing markets are

historically linked to the overheating of the macroeconomy and growing

infl ation, followed by a tightening of monetary policy and the raising of

interest rates to correct this phenomenon (Aherne et al., 2005).

Table 1.2 Households by tenure in selected countries.

Housing market and the economy

The relationship between the housing market and the economy is more complex than this simple focus of the macroeconomy on house prices Much interest has centred on the role of the housing market on consumption

Housing is not just any good as it accounts for a high percentage of income for many households The Keynesian ‘absolute income hypothesis’ with its close link between current expenditure/savings and current income or earn-ings was challenged in the 1980s This is illustrated by the experience of the

UK during this period; with savings falling dramatically and consumer spending rising faster than average earnings it suggested that the Keynesian view was incomplete The consensus explanation was in the role of perma-nent income and wealth: the dramatic rise of house prices in the UK (and in other countries) signifi cantly increasing the wealth of households and reduc-ing the need to save for, say, retirement Case and Quigley (2008) examine this relationship in the USA and suggest that the relationship is not so straightforward They fi nd that the wealth effect works only when the hous-ing market is booming but the reverse does not happen when house prices fall The reason for the asymmetry may be because unless they are selling their home people do not perceive that their own house price will fall in the medium to long term

An alternative perspective on this relationship between consumption and the economy sees the growth in consumer spending arising from, or at best encouraged by, positive prospects for the economy, and this process is under-pinned by house price rises that permit mortgage equity withdrawal (where the fi nance system permits) as a means of funding such expenditure more

cheaply than unsecured borrowing (Aoki et al., 2001) Similarly when house

prices are rising this is usually associated with greater turnover or housing transactions which leads to a rise in expenditure on complementary goods such as furniture and carpets

A further dimension to this relationship between consumption and the

housing market is outlined by Aoki et al (2001) They develop a model that

simulates the impact of a reduction in interest rates using the fi nancial

accelerator model of Bernanke et al (1999) and applied to housing, in which

imperfections in credit markets amplify and propagate shocks in the economy The mechanics of this dynamic is broadly as follows: a positive shock in economic activity causes a rise in housing demand, which leads to

macro-a rise in house prices macro-and so macro-an incremacro-ase in home owners’ net worth macro-and their ability to borrow Changes to the (de)regulation of banks over time have infl uenced these mechanisms Some commentators have argued that the

fi nancial liberalisation policies gradually endorsed by most countries since the 1970s has led to excessive liquidity thereby increasing household debt

Arestis and Karakitsos (2010) propose that monetary policies should

incorporate the targeting of net wealth (and hence the housing market) of

the personal sector rather than just price stability via interest rates

The housing market also impinges on the economy via new investment in

the form of building or more precisely housing completions The value of

this output is an injection into the economy with an associated multiplier

effect Case and Quigley (2008) examine the effect via a downturn in housing

completions in the USA This is a decline in investment or a reduction in

injections into the economy They note two induced effects: fi rst the impact

on associated businesses such as mortgage brokers including second-hand

sales (to buy new houses) and second induced expenditure on furniture etc

They apply a multiplier of 1.4 to account for these impacts

Investment can also be seen as a major dynamic of the business cycle via

the (Keynesian) accelerator Within this perspective new house building as a

component of investment (representing the order of say 20% of investment

but variable over time and between countries) is a major driver of the

economy However, the supply of new housing is in turn determined by the

operation of the housing market and in particular viability is a function of

house prices Within this theoretical framework a housing ‘crisis’ through

weakening housing prices and residential investment/construction could

lead through to a subsequent recession Leamer (2007) studies residential

investment cycles and their importance for the economy in the US and

concluded:

‘Eight of the ten recessions were preceded by sustained and substantial

problems in housing and there was a minor problem in housing prior to the

2001 recession The one clear exception was the 1953 recession, which

commenced without problems from housing.’ (Leamer, 2007, p 164)

By use of similar techniques Danish residential investments were

shown to contribute to weakness in GDP growth one year before an actual

recession.1

Notwithstanding the arguments about the potential leading role that the

housing market can play in contributing to an economic downturn the

evidence presented in Table 1.1 is that for most countries the fall in real

house prices followed the world global crisis The downturn since 2007 has

a very different origin, effectively an exogenous event in the form of the

sub-prime banking crisis creating a fi nancial collapse with consequences for

housing markets around the world Even in countries already suffering real

price falls the crisis probably magnifi ed this market downturn Similarly in

countries with historically high real house prices prior to the credit crunch

then this is likely to have had a detrimental impact on the subsequent

performance of the economy for the reasons outlined above The chapter

now examines the long-term roots of this fi nancial crisis and its specifi c

short-term impacts on the housing market in different countries

Origins and impact of credit crunch

The credit crunch had a dramatic impact on banks and the supply of mortgage credit but the origins of the problem can be traced back to the deregulation of the banks in the 1980s It stems from banks seeking to maximise their lending by borrowing It is easiest to illustrate for mortgage banks in the UK (or building societies) but the story applies more generally with different timings and institutional arrangements Mortgage banks originally grew by attracting savers with funds Thirty years ago building societies in the UK would require only a small number of savers for each mortgage offered As they sought to expand they needed to attract more savings but to do this the additional savers tended to save less per person and so more savers were needed per each mortgage granted This was achieved through attracting savings customers through their branches and hence the funds are described as ‘retail’ (Jones, 1984)

Eventually the additional growth from this source became exhausted as it was more and more expensive to attract marginal savers who only had lim-ited funds The building societies/mortgage banks turned to ‘wholesale’

funds, i.e borrowing from institutions and large investors around the world

This was already well established in the USA through publicly sponsored agencies such as Fannie Mae (see glossary, and chapter 10 for a UK bank case study) by securitising (publicly insured) mortgages

In the lead-up to the credit crunch the balance of funds raised from retail and wholesale sources in the UK varied by mortgage lender, with some almost entirely dependent on the latter With constraints on the degree to which building societies can access such funds those institutions that wished to use wholesale funding extensively had to convert to being a bank

The cheapest way of borrowing was undertaken by issuing bonds backed by the mortgages already issued which were bundled up together In this secu-ritisation process investors who bought the bonds were assured of a given rate of interest for a fi xed number of years (with a set redemption date) sup-ported by the income These are known as ‘residential mortgage backed securities’ However, there is the risk of default by the original mortgagors

In the original American model all this risk was underwritten by the government

With deregulation the use of these bonds in the USA was extended beyond the inclusion of only publicly insured mortgages based on conservative lending criteria The noughties saw a dramatic increase in the global issue

of these bonds, roughly quadrupling between 2000 and 2006 (Crosby, 2008)

The international extent of the use of residential mortgage backed securities including ‘covered bonds’ (see glossary) is demonstrated in Table 1.3 These bonds were increasingly backed by subprime mortgages, amounting to

around one-third of such bonds issued in 2005 (Crosby, 2008), but the system

collapsed when there was a ‘subprime’ mortgage crisis

Subprime mortgages are loans that are offered to house buyers who have

poor credit histories and are offered on higher than usual interest rates to

refl ect the higher risk to the bank They can be a bone fi de way of offering

people with past debt problems a chance to rebuild their credit risk and

ultimately transfer after a number of years to a standard mortgage Subprime

mortgages also provide opportunities for households excluded by mainstream

lending In the UK, for example, many low-income households who took up

the opportunity to purchase their council home under the government

‘Right to Buy’ scheme in the noughties bought with a subprime mortgage

(Jones, 2009) The long rise in house prices from the mid 1990s encouraged

a dramatic increase in subprime lending in many countries (see Jaffee, (2008)

for USA) as households were attracted by the potential investment return

and lenders forgot that price booms never last

Subprime mortgages are inevitably more prone to foreclosure In 2007

these foreclosures rose dramatically in the USA and this coincided with a

severe downturn in house prices (see below) It is probable that the

subse-quent rise in foreclosures was exacerbated by the fall in house prices (Jaffee,

2008), and the decline in values also undermined the fundamental values of

the assets secured by these loans However, there are also allegations that

in  the heat of the property boom mortgages were sold to people who

would never have had the fi nancial capacity to pay On the face of it this

Table 1.3 International residential mortgage backed securities

and covered bond balances outstanding in 2008Q3.

Residential mortgage backed securities € bn

Covered bonds € bn

Notes: Multinational bonds includes all deals in which assets originate from a

variety of jurisdictions Covered bonds refer only to those where the underlying asset is mortgages and relate to balances outstanding at the end of 2007.

Source: Crosby (2008).

seems  simply an American banking issue created by the deregulation of the secondary mortgage market at the beginning of the noughties The problem mushroomed into a global fi nancial crisis because the US banks with these subprime mortgages had also parcelled them up (just as in the UK above) with other mortgages to support the issue of bonds Furthermore the scru-tiny of the risk associated with these bonds was extremely lax and many received the rating of triple A from credit agencies.

Banks from around the world had bought these bonds as part of a global

fi nancial capital market which encompasses equivalent products (not just linked to residential mortgages) in other countries This interbank market

of bonds allows banks to manipulate/control their liquidity and so mise the cash they need to hold to be available to customers Bonds can be sold quickly to improve liquidity/cash holdings In this case the bonds were ultimately found to be supported by assets that were worthless and so the bonds in turn were worthless While the subprime crisis was at its extreme

mini-in the USA, and arguably confi ned to that country, the impact on the mini-national mortgage backed securities (bonds) market and their values was devastating These securities no longer had credibility as assets as no one could be confi dent about the underlying assets It was impossible to distin-guish between bonds secured by good or bad assets because of the failure of the credit rating system No one would buy them but the real problem for the banks was just beginning

inter-The biggest problem occurred when these bonds were to be redeemed and refi nanced In normal circumstances new similar bonds would be issued to pay off the fi rst set of creditors but this was no longer an option Banks in western economies were also more generally unwilling to lend to other banks because of uncertainties about creditworthiness This was partly in the light of the failure of the Lehman Brothers bank in September 2008 but also because of potential hidden bad debts It was unclear who owned these worthless subprime assets because of the maze of the world capital markets, and as commercial and residential assets fell in value this led to the failure

of property companies and more foreclosures

Some banks were facing this problem in late 2008 and, with insufficient funds, banks had to issue more shares to make up the shortfall in funds

With few takers, these shares have been bought by governments who have become the major shareholders, i.e banks have been partially nationalised

This is referred to as the re-capitalisation of the banks as effectively ers’ money has been used to rebuild the capital base of the banks to replace assets that have become almost worthless

taxpay-This period of rebuilding by the banks (where necessary) has also been a period of retrenchment in terms of lending, generally refl ected in less liberal lending criteria exacerbated by expected falls in house prices and economic uncertainties The reappraisal of risks led typically to stricter loan-to-value

ratio requirements and severe reductions in the availability of mortgage

fi nance Scanlon et al (2011) report on these reductions from late 2007

to  late 2008 for 12 countries that suffered price falls and their results are

summarised in Table 1.4 The declines ranged from, at the extreme, Ireland

with a 59% fall to only 19% in Australia where the house price fall was only

a modest 9% For most of these countries the fall in mortgage fi nance was

of the order of 40% or more

The short-term impact of the credit crunch on the housing market is best

seen through the prism of nominal house prices Nominal prices are

impor-tant for housing market dynamics in terms of infl uencing household

deci-sions, and falls can create negative equity with the threat of foreclosure

Falls in nominal house prices can also be critical for the profi tability and

output of the house building industry An overview of nominal house price

trends since the global fi nancial crisis for OECD countries is given in

Table 1.5 and shows a common fall in prices in the four quarters to the end

of 2008 Even where there is not an actual fall in house prices there is a

slowdown in growth The only exception to this pattern is Switzerland The

pattern of price change also identifi es Ireland and the USA as leading this

downturn; Japan too stands out as experiencing consistent annual falls in

house prices over the whole of the fi ve-year period, 2006–2010, albeit with a

deterioration from 2008 on

A closer view of the response of national housing markets to the global

fi nancial shock is provided by Table 1.6 which details the precise turning

points and price paths for selected countries The market outcomes can be

characterised as price waves that peak broadly at the same time but follow

Table 1.4 Falls in mortgage finance in selected

countries between late 2007 and late 2008 †

Country

% fall in number of new mortgages

% fall in value of new mortgages

† Selected countries where price falls had occurred.

Source: Scanlon et al (2011).

Table 1.5 Annual change in nominal house prices 2006–2010 in OECD countries†

† Annual growth to the fourth quarter.

*Up to third quarter of 2011 Source: OECD Quarterly House Price Data.

Table 1.6 Paths of change in nominal house prices 2006–2010 in selected

OECD countries.

Country

First peak quarter

First trough quarter

Fall from peak

to trough

Change from peak to 2010Q4

subsequent divergent ripples From this table it can be seen that the housing

markets in Ireland, Denmark and the USA had already turned down before

the international crisis had begun because of internal domestic forces Most

other countries experience house price peaks from the fourth quarter of

2007 onwards

Some care needs to be taken in the interpretation of these turning points

because the timing depends to some extent how, or more precisely when, the

house price data is collected As a result, alternative sources of data for the

same country could come to different conclusions For example, official

sta-tistics in the UK, collected at the formal completions of a house sale put the

peak quarter at the beginning of 2008 whereas the Nationwide Building

Society’s seasonally adjusted index identifi es the fourth quarter of 2007 and

the Halifax Bank’s equivalent index reports it earlier, as the third quarter The

differences partly refl ect the fact that latter two are based on successful

mort-gage applications, and there is a lag to the formal completion of the

transac-tion Whichever index is used, the peak of the market in the UK, as in most

other countries, is in September 2007

This retrenchment in national housing markets refl ects the dramatic cuts

in mortgage lending that followed the aftermath of the bail-out of the

bank-ing system across much of the western world Indeed, it can be seen as the

clear primary causal factor, because other main macroeconomic forces on

the housing market, interest rates and economic growth, were not (yet)

dampening demand There was a concerted effort by governments around

the world to reduce interest rates in the wake of the banking crisis The US

base rate rapidly fell from 5.25% from August 2007 to zero% in December

the following year before stabilising at 0.25% In the UK, bank base rates

also began to be reduced in December 2007, falling eight times over 16

months from 5.75% to 0.5% in March 2009 They have continued at this

level for over two years The European Union base rate was similarly reduced

in stages At the time of writing, in July 2011, interest rates around the globe

remain at historically low levels although the spring of this year saw a very

modest upward movement in some countries

This reduction of interest rates has therefore supported housing markets

since 2007 by substantially easing the cost of borrowing Major economies

have suffered recessions with knock-on effects for housing demand, but the

brunt of the falls in real output (GDP) occurred from 2009 onwards, after the

housing market had already turned down Some countries such as Australia

and China experienced only a slowdown in economic growth and this is

refl ected in the housing market trends discussed in subsequent chapters

However, it is interesting to note that the countries that led the

interna-tional reverses in housing prices, such as Ireland and Denmark, generally

experienced earlier recessions, reinforcing the arguments discussed earlier

of the reverse link between housing market and the economy

Perusal of Table 1.6 reveals that in many countries house prices began to recover approximately only a year – or in some cases less – after a sharp fall

But in some cases at least three years on from their respective market peak house prices continue to decline These countries are Greece, Ireland, Italy, the Netherlands, Spain and the USA Even where the immediate price down-turn was stemmed prices had not necessarily recovered the ground lost by the beginning of 2011 Countries in this position are Denmark, New Zealand and the UK Furthermore even after three years there are doubts about the  sustainability of the market recovery in these countries, with prices dipping again or stuttering The persistence of mortgage lending constraints combined with fi scal cutbacks still stifl es demand

The legacy of the credit crunch three or four years on is a continuing and widespread international dampening impact on housing markets In OECD countries the exceptions to this general pattern are Australia, Norway and Sweden Where there is recovery it is interesting to note that in many coun-tries the rise in house prices has not been accompanied by the normal dynamics of a housing market upturn Housing transactions and new hous-ing supply have been at a low ebb across Europe for example These market conditions suggest fragility even in some countries where there has been a revival of house prices (Ball, 2011)

An important short-term question about the signifi cant house price falls and mortgage lending cutbacks (where they have occurred) is to what extent it matters beyond the impact on an individual household’s wealth Some households who bought at the top of the market will have negative equity in their home although they may have been cushioned by the fall in interest rates For households seeking to purchase their fi rst home the impact has been bitter-sweet, for while the fall in real prices has ostensibly made owner occupation more affordable the tightening of credit availability outlined above has left many of them ultimately frustrated Their prospects depend on the easing of lending criteria but this is not on the immediate horizon There are also potentially severe ramifi cations for the house building industry with the fl ow of potential buyers turned off

The distributional impacts are only part of the policy dimension There are two wider but opposite perspectives that are espoused: the performance

of the housing market can be viewed as the pulse of the economy while the alternative sees rising house prices as unproductive fi nancial investment

The latter view is also associated with a belief in unsustainable housing bubbles created by easy availability of credit, low interest rates, and even 125% mortgages The recipe for economic growth and housing policy of these two confl icting views is diametrically opposed: supporting the hous-ing market through perhaps help to fi rst time purchasers, reductions in stamp duty, etc versus allowing house prices to fall and increasing housing

taxation to discourage speculative investment in bricks and mortar, and in

turn to encourage capital toward productive investment

These alternatives focus on linkages between the business cycle and

hous-ing that revolve simply around house prices but the reality of the

relation-ship between the housing market and the economy is more complex as

noted above This book refers to this as the housing economy and it is

dependent on national housing market structures encompassing tenure,

taxation, mortgage fi nance and the role of the planning system in infl

uenc-ing supply The challenges of the housuenc-ing economy are not just the

short-term practical ‘fi refi ghting’ to address the immediate problems created by

the credit crunch including minimising mortgage foreclosures and

home-lessness There are also longer-term underlying forces building up in the

housing economy that have been exposed or highlighted by the fi nancial

collapse and the subsequent fi scal crisis These include the distribution of

wealth between generations, the constraints on housing supply and the

fi nancing of social housing

Objectives and structure of the book

This book explores these challenges by taking an international perspective

that draws on chapters from a range of countries with different experiences

of the housing market over recent decades It attempts to draw on the broad

spectrum of international circumstances with individual chapters

empha-sising particular issues to a country There are chapters on rising housing

markets that have been relatively immune to the fallout from the credit

crunch, namely Australia and China There are also chapters on Germany

and Japan that have very distinctive house price trends, and did not

participate in the almost global house price boom, refl ecting institutional

differences and macroeconomic performance The countries with the most

volatile housing markets identifi ed above, namely Denmark, Spain and the

UK are considered in separate chapters The USA is discussed in two chapters

which draw out the implications of the aftermath of the housing boom and

the pain of local experiences beneath national statistics that hide substantial

spatial variation Finally there are three chapters that centre on the role of

rented housing and the role of the state

The book begins with the two chapters on the USA In the fi rst, US

housing policy in the era of boom and bust, Richardson et al describe and

explain the geography of the major US housing market trends of the past

two decades The chapter argues that the boom was unsustainable and

emanated from federal housing policies over three administrations through

the relaxation of mortgage deposit constraints to promote homeownership

Combined with long-term public policy that offered federal mortgage

insurance and tax relief on mortgage interest payments, this was a toxic policy mix The authors then analyse a range of housing policy reforms that might have avoided, or at least mitigated, the bust that happened, and what might ensure that these problems will not recur.

In the following chapter, Housing bubbles and the foreclosures that follow:

the case of Las Vegas, Depken et al undertake a case study of Las Vegas that

illustrates an extreme local outcome of speculative investment within the recent housing market boom and bust in the USA It also introduces to many

readers a new term, flip, as any property that sells within two years The

impact of the extensive occurrence of this short-term investment strategy in Las Vegas is shown to challenge the normal stickiness of house prices in a downturn as sales fall away rather than prices Rapidly falling prices in Las Vegas have arisen from fl ipping activity The chapter demonstrates how, as

fl ippers could not fi nd buyers in the downturn for houses bought near the peak, this led to mortgage defaults Foreclosure activity then picks up and becomes the majority of transactions, so prices fall dramatically In fact, the authors argue that such speculation was not forever sustainable as eventually housing stock growth must mirror population growth In the meantime, there are many thousands of homes in foreclosure that lenders have not sold, with a consequent shadow on the future of the local market

The links between the labour market and homeownership and the implications for housing wealth are the focus of the next chapter, by Moriizumi and Naoi, drawing on the experience of Japan Owner occupation

is the majority tenure (61%), private rented housing accounts for (27%) and there is only very limited social housing (6%) The chapter, entitled

Unemployment risk, homeownership and housing wealth: lessons from the bubble aftermath in Japan, examines the consequences of the housing boom

of the late 1980s, and subsequent collapse in the early 1990s that was followed by a prolonged recession The chapter considers the impacts of this housing boom and bust on households with different housing tenure status

in Japan, and the consequences for the timing of homeownership by fi time buyers It outlines the housing price fl uctuations and deteriorating labour market conditions in the long post-bubble period The continuous decline in house prices after the bubble burst is shown to bring reverse wealth effects on consumption expenditure by homeowners

rst-The chapter demonstrates how typical young fi rst-time buyers suffered from rising housing prices in the bubble era, and from the higher unemployment rate in the post-bubble period Positive effects of declining house prices in the 1990s on affordability were outweighed by the increased unemployment risk in the same period, resulting in a virtually stable homeownership rate among young households Housing wealth effects, they argue, are substantially larger for households with losses in housing wealth/price falls than those with gains

China has seen dramatic rising housing prices over the past decade and

did not suffer a downturn in the economy and housing prices after the

fi nancial crisis of 2007/08 Yiu and Xu note, in their chapter, The changing

nature of household demand and housing market trends in China, that the

boom is generally perceived to be driven by fundamental

socio-economic-demographic demand factors, such as a substantial increase in disposable

incomes in recent decades and the growing up of ‘baby-boomers’ from the

1960s, etc However, this chapter puts forward evidence to refute this

emphasis on these forces, noting the apparent existence of an oversupply yet

there is a house-price-to-income ratio in Shanghai of 20 Instead, they

emphasise regional differences, monetary policy and the operation of capital

markets in China as the root of the house price boom In particular with

very limited investment vehicles in China the housing market has become

almost a pure investment medium or even a speculative commodity market

for infl ation hedging

Australia is another country that suffered only the slightest impacts from

the international fi nancial crisis Yates in her chapter, The structural

sustainability of homeownership in Australia, draws out the long-term

consequences of house prices rising faster than earnings on the structural

sustainability of homeownership She shows how it has added to barriers for

aspiring fi rst-time house purchasers in Australia who are unable to compete

with increased demand from established owner-occupiers and investors, so

that access to homeownership for young households moved higher up the

income scale There are therefore limited housing options for low- to

middle-income households, and reduced access to the tax advantages of

homeowner-ship adds to wealth inequalities and limits asset accumulation that protects

housing costs in old age In fact, while there has been a plateau in the level

of homeownership in Australia since the early 1960s Yates demonstrates

that owner occupation rates in young households have been falling since

1976 The fi nal part of the chapter projects forward current trends and the

underlying forces and suggests that the existing level of homeownership is

unsustainable This raises signifi cant issues about intergenerational equity

and long-term government policies toward the support of the elderly

The intergenerational theme is also taken up by Lunde in his chapter,

Impacts on wealth and debt of changes in the Danish financial framework

over a housing cycle, for a country which has the highest level of household

debt in the world He dissects how different age cohorts fared over stages in

the recent housing cycles Lunde notes that there has been a fall in the

owner occupation rate among the younger generation The analysis shows

that young owner occupiers who succeeded in buying are the most heavily

in debt, and that they gained least from the long rise in house prices

Following the credit crunch they are also shown to be the most vulnerable

to any future market instability Overall Lunde fi nds that the long housing

market upturn from the mid 1990s benefi tted the elderly at the expense of the young, creating barriers to owner occupation and fi nancial strains on many who did succeed in buying a home.

The intergenerational issues have been highlighted in many western tries by the increased deposits required by banks in the post credit crunch era resulting in greater barriers to homeownership for young people The experi-ence of Germany is instructive here as this is the long-term model of hous-

coun-ing fi nance there The next chapter, Market stability, houscoun-ing finance, and homeownership in Germany, by Westerheide speculates whether the

remarkable stability in the housing market in that country can be attributed

to the operation of this housing fi nance model or the low income growth

The theoretical literature notes that the impact of down payment constraints

on volatility is ambiguous as it partly depends on the potential indirect effects on saving levels However, Westerheide fi nds that the impact on sav-ing in Germany is minimal and that the answer partly lies in the availability

of comparable houses to own and rent and these will vary across countries

The scale of the exogenous shock caused by the credit crunch is strated by two chapters that take a supply perspective Taltavull in her chap-

demon-ter, The responsiveness of new supply to house prices: a perspective from the Spanish housing market, shows how housing construction activity in Spain

expanded from the late 1990s The strong new supply growth was the opment sector’s reaction to market impulses stemming from a rising number

devel-of new households due to the young structure devel-of the population in Spain, the attraction of labour immigrants (about 4 million in seven years), a growth of retired/semi-retired buyers from other European countries that were very focused in a few regions, and very strong internal movements of the domes-tic population in those areas with rising economic activity All these fl ows coincided with exceptional good economic conditions (job creation, low interest rates, low relative housing prices and an expansive fl ow of liquidity within the fi nancial system encompassing both Spanish and European banks) These trends coincided with a relaxation of the planning system

Housing construction reacted positively because of the compliant ning system ensuring land availability and the immigration of construction workers She demonstrates an increasing supply elasticity during this period, although it begins to reduce in the noughties The high supply elasticity explains the strong contraction in construction activity that occurred after

plan-2008 when the liquidity fl ows towards the fi nancial markets stopped and Spanish banks and saving banks reduced the amount of fi nance to develop-ers, fi rst, and then to households The aftermath of the credit crunch has been both a dramatic reduction in housing starts (reaching an historical minimum) and the level of housing market transactions Nevertheless the housing market still has a high level of affordability and prices have not fallen substantially

The post credit crunch story is much the same in the UK although there

were differences in terms of the supply response to the housing price boom

of the noughties In the next chapter, The UK housing market cycle and the

role of planning: the policy challenge following the financial crisis, Jones

quotes a government discussion paper in 2007 that acknowledges that for a

generation the supply of new housing has not kept pace with rising demand

But the number of houses built in 2010 was the lowest since 1924 House

prices from their peak around the end of 2007 showed an initial relatively

quick recovery before falling away moderately They have now broadly

sta-bilised and are back at their 2006 levels after reaching a trough in the spring

of 2009 The major constraint on recovery has been the mortgage famine

leaving transactions at a low ebb Jones argues that this initial relatively

quick upturn compared with the previous recession was partly down to a

different policy response (constraints on foreclosures and stamp duty

holiday) but also down to the long-term housing supply constraints that are

a function of planning policies These policies have also contributed to

higher density development and an emphasis on the construction of fl ats

The overhang from these policies, Jones argues, will shape and constrain a

housing market recovery

The impact of the credit crunch in terms of the decline in private house

building together with the long-term barriers to homeownership leads to a

major policy challenge of the provision of affordable housing particularly for

low-income households The traditional solution for many countries has

been social housing Whitehead charts Developments in the role of social

housing in Europe and the long term move away from housing as a core

ele-ment in the welfare state, and the shifting of subsidies away from bricks and

mortar towards income-related subsidies Over time there has been increased

private sector involvement (and rent increases) with the development of

sophisticated fi nancial instruments to support this process and the transfer

of ownership to individuals and private and non-profi t landlords The most

extreme changes have been in ex-socialist countries

Since the credit crunch, social housing investment has been seen as an

important part of stimulus packages: examples include in England ‘Kickstart’ –

additional capital funding for ‘shovel ready’ development; in France additional

funding made available to increase social sector output; and in Norway –

counter-cyclical funding policies to assist affordable housing Whitehead notes

that the longer-term position is much less clear with cutbacks in public

expenditure Europe wide At the same time there is likely to be an increasing

demand for rented housing as the economies stutter forward over the next few

years and governments will have to continue to be involved

In his chapter, Funding affordable housing in the UK, Gibb illustrates the

options for funding models in the UK, given the government’s commitment

to reducing public expenditure substantially He notes how value for money

is now a central criterion in public policy to ensure that public funding goes further This will undoubtedly be an international theme He draws on the Scottish government’s approach that is now comparing different funding models that explicitly assess the public cost of each additional unit (stand-ardised for years of life) and the relative benefi ts, whereas before these choices may have been determined more by political infl uence As a result, the public sector is promoting the part funding of ‘intermediate renting’ at rent levels above existing social housing.

The retreat of the role of the state in many countries leaves a question about whether the private rented sector can fi ll the gap Ball in his chapter,

The private rented sector as a source of affordable accommodation, reviews

the role of the private rented sector in the UK He fi nds that while there has been a substantial growth in private individual landlords over the past dec-ade it is unlikely to see a further signifi cant short- or long-term expansion because of the ageing of the population Nevertheless, young households rationed out of homeownership because of the current restrictive loan-to-value ratios applied by banks will continue to look to this sector and this would lead to more crowding within existing housing

Ball considers whether the private rented sector could expand its role to

be a permanent tenure for some households by providing greater security of tenure for tenants or introducing ‘second generation’ rent controls He argues that these policies are unlikely to improve – and will probably worsen  – the housing situations of low-income households Drawing on international experience Ball also does not foresee any large scale insti-tutional investment in this sector because of the weak economies of scale of private landlordism He concludes that is impossible to compensate for general supply-side-induced housing shortages through adjustments in the operation of specifi c tenures

The fi nal chapter will reprise the principal themes presented in the book and compare and contrast the key fi ndings from the contributions It will draw conclusions about what the contributions tell us about the impact of the fi nancial crisis on the housing economy and long-term housing market issues, drawing out international similarities that transcend institutional/

cultural differences between countries as well as explaining signifi cant variations

Summary

The chapter has developed a framework to examine the short-term links between the housing market and the macroeconomy together with more long-term underlying infl uences that shape a nation’s housing market

It has also established the international context for the analyses presented,

both highlighting the exceptionally long house price boom, beginning in the

mid 1990s, that was shared by many countries, but also pointing to major

exceptions to this cycle such as Germany and Japan It then developed an

overview of the lead-up to and the impact of the credit crunch on housing

markets around the world It noted the development of mortgage backed

securitised bonds designed to increase bank lending and profi tability The

selling and buying of these bonds and other sophisticated instruments on

international capital markets with the aim of improving banking liquidity

ultimately almost brought the global fi nancial system to its knees In its

wake there were major bank casualties and the consequent bailouts by

national governments wrought fi scal crises and in some cases rejection at

the ballot box in subsequent elections

While the importance of the role of credit in the housing market has been

dramatically emphasised by the fi nancial crisis the role of interest rates and

household incomes remain crucial short-term underlying infl uences There

are also a wide range of long-term factors on national housing markets

including demographic trends and what can be described as ‘institutional’

contextual determinants such as tenure, planning and taxation This

chap-ter has demonstrated that many housing markets were at different points in

the cycles when the global crisis occurred, and that these institutional

fac-tors are likely to be a strong infl uence on the outcomes and policy response

The chapters partly explore these short-term consequences of the fi nancial

crisis but contributions also reveal common long-term global trends in

housing markets

Note

1 I am grateful to Jens Lunde for these points.