Tuesday, May 19, 2009

Housing Bubble

Germany, it seems, had no housing bubble of its own, but German banks partook heavily of credit derivatives built on housing bubbles elsewhere. By contrast, France experienced a fairly substantial increase in housing prices, but its banks, as far as we know to date, were much warier of exotic derivatives. I haven't yet seen any good explanation for the differences in bank behavior. The difference in housing prices is partly a matter of demographics and partly due to the size and composition of the housing stock.


James Conran said...

The Irish banks also managed to avoid fancy derivatives but were still more than capable of landing themselves in a whole lot of merde by pumping our bubble (with the help of German savings). The Spanish banks seem in relatively good shape considering the size of their housing bubble - apparently their central bank took its regulatory role a bit more seriously than elsewhere.

Boris said...

Very interesting. It Would have been interesting also to compare with the Housing Bubble in France...

bert said...

How to explain a runup in French prices, in the absence of a domestic property craze? Arguably not by looking at supply ("the size and composition of the housing stock"), but rather at demand, particularly from foreign buyers.
Clearly, the effects varied markedly region by region, and expat demand can't account for anywhere near all of it, but there was unquestionably a spillover from overheated markets in the UK and elsewhere.

Boris said...

to Bert : actually, the housing supply is chronically low in France, ever since WWII. Whenever growth, buying power, interest rates, and psychology align, it will create a bubble (cyclically it seems), regardless of external pressure, which only accounts marginaly (well, as you point, that may have more effects on some regions, such as Paris, Dordogne, Normandy...).
A proof is that the market is rather steady in Paris, where the foreign demand is down, and prices elsewhere are going down at a much slower rate than the countries shown in the graph (of course it may change in the coming months/years).
But I would not agree with your diagnostic of an absence of domestic property craze. There's been a significant increase in the proportion of owners (which I think for the first time passed the 50% mark), and that's a new phenomenon. In fact conversation on real estate had all but replaced political discussions in many parties I attended - and the "bobo" phenomenon (even though I hate the extended meaning the word has now taken) is much about becoming owners, and the complete change in attitude it entails.

Unknown said...

As for the difference in behaviour between German banks and French banks, I would suspect that it is a product of the massive drive of Deutsche Bank and Commerzbank towards internationalisation in the nineties through the outright purchase of foreign (eg US and UK) banks. As anyone cognisant of the subject knows, international take-overs are usually disastrous, with extremely few counterexamples (Renault-Nissan is one). In any case DB and CB exposure to exotic products were mostly due to their banks in the UK and US, I suspect.

Why did French banks not rush in the same way is in part a product of history. A number had tried to in the late 1980s and encountered disaster (Credit Lyonnais anyone?). So the memory was still fresh and painful.

It is telling that Natixis and Credit Agricole got somewhat exposed: they had not internationalised in the eighties, Natixis because it did not exist then and Credit Agricole because it was just starting to emerge from its peculiar ownership structures and agricultural bias (there were 4 people in the capital markets division of credit agricole who spoke some english in the late eighties, two who could function in english, two who could order fast food in english, I kid you not).

So those two were late comers to the party and quite keen, especially credit agricole which had swallowed a major french investment bank (indosuez).

bert said...

Boris, you'll notice my comment is carefully hedged - I think the essential point of agreement between us is that there was regional variation. In my direct experience, the dinner conversations in both Brittany and Languedoc revolved around the inability of locals to afford local property in the face of demand from incomers. But I don't doubt that Paris presented a very different picture. Those dinner parties among the boboisie sound very familiar to a Londoner.

As you point out, supply constraints are a constant for the last 50+ years, which makes them less persuasive as an explanatory variable.

Unknown said...

On price behaviour for housing, there is much more than housing stock and demographics, as Barry Eichengreen explained in a recent paper (http://www.econ.berkeley.edu/~eichengr/crisis_euro_5-1-09.pdf): the creation of the euro was a fundamental shock to housing as traditionally high interest rate/high inflation countries saw lending rates crash down to euro levels, and traditionally low interest rates/low inflation countries saw some rise in average real lending rates. A self serving remark: I had written something along those lines some ten years ago, without of course foreseeing a housing bubble, when I tried to guess which countries would profit from the euro.

FrédéricLN said...

There has been a huge construction effort in France after WWII ("reconstruction", yet at a smaller scale than in Germany or other devastated countries), and until the end of 60's, due to "exode rural" (rural exodus ? rush from countryside to cities, as farming productivity increased sharply and industry developed fast).

Construction since the 80's is pushed by households' desire to leave this urban, often rented, buildings for own houses in "the countryside", meaning greener suburbian areas.

"Social buildings" (HLMs) in towns were rented by white-collar neo-urban families, they have been replaced since the early 80's by immigrants. The degradation of these townships required "urban policies", including some deconstruction / and a few reconstruction, as in some areas in the US.

Nevertheless, "urban renewal" is very very slow, as immigrant or low-income families have not much influence on policies. Housing State policies since the 80's are mainly targeted to foster financial investment in real estate and individual houses ownership (Sarkozy : "faire de la France une nation de propriétaires", or smthg like that). That includes "zero interest loans" and many tax advantages to encourage real estate ownership. These policies try to solve a non-existent issue (the ownership rate in France is already at a high level compared to other European countries) and their unintended effects are many : i. the ecological nightmare of low-density urban growth, as each village authority (mayor and Counsel) can gain much by allowing construction on some parts of land ; ii. credit burden on households (yet lower than in the US) ; iii. Reluctance to move towards other areas to find jobs : long-term persistence of "high unemployment areas" where industries were shut down in the 80's due to globalization ...

... but that's the smallest part. Tax advantages for investors are often blind, and that was the case of the "Robien" law. It has strongly encouraged the construction of small flats buildings (condos ?) in smaller towns were there were no jobs, so no demand of young households for condos. That meant many contracts for building companies, that couls not follow the pace, so the price of construction increased very sharply in the 00's, at equal quality. The price was paid by individual households building their own house, and by the State and local authorities that could not any more afford meaningful "urban renewal policies". Of course, this increase in the price of new housing was contagious : the value and price of the real estate stock increased, too.

That's for the prices bubble - the next law replacing the "Robien" may help (I don't know its content).

Er, I don't know, for our banks. Some of them have been very early adopters of financial maths and securitization, as far as I know, but they did not apply these methods on the domestic housing market. I guess they may have had an untold gentlemens' agreement not to compete sharply on housing rents since the beginning of 00's. They incrased their prices and commercial margins on the household banking activity, to invest the money on international investment banking ... and own real estate activities.

Er, that's a blog comment - much of this would need checks and sources !