bvk ivdc 20-10-2009
TRANSCRIPT
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N am e of Presentation | S pea ker | D ate | Pa ge 2
Talking about US Housingbubble since 2004
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- -H ou sing b ub ble | Ivan Va n de C loot | 2 0 1 0 2 00 9 | Pag e3
Exuberant expectations
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- -H ou sing b ub ble | Ivan Va n de C loot | 2 0 1 0 2 00 9 | Pag e4
Markets are not efficient
=bubbles exist
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Prices increased more inBelgium than in US…
Belgium
Netherlands
US
Britain
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…much more in fact.
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House price-income ratioexploded in Belgium
Belgium
Netherlands
Britain
US
Japan
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Macro-econometric research: eg. IMF, ING
Asset-pricing approach: eg. OESO
Eventstudies: Helbling (BIS)- House price bubbles-a tale based on housing price booms and busts
Vector Autoregressive Models (VAR): eg. 1)
Christopher Otrok Marco E. Terrones: House Prices,
Interest Rates and Macroeconomic Fluctuations:International Evidence 2) World Economic Outlook
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Fundamentals?
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- -Housing bubble | Ivan Van de Cloot | 20 10 2009 | Page9
Strong collateral?
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Macroeconometric
research
nInteresting to look at “average reactions”
n= Bell Curve economics: won’t be able to detectbubbles
nEven this conservative research: overvaluation of Belgian real estate
IMF (2006): 17%
ING (2009): 16% probable, 44% if in line with previous
correction
n
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Wages and house prices:
45% out of line
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IMF: Macroeconometric
study
-10
-5
0
5
10
15
20
25
30
35
I r e l a
n d
N e
t h e r l a n
d s
U K
A u s
t r a
l i a
F r a n
c e
N o r w
a y
D e n m a
r k
B e
l g i u
m
S p a
i n
S w e d e n
I t a l y
J a p
a n
U S A
F i n l a
n d
G e r m a
n y
C a n a
d a
A u s
t r i a
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Upward shock in realinterest rates
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Overvaluation measures sensitive
to choice of “equilibrium”
30 0%
40,0%
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Belgium is not cheap if corrected for bubbles
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- -Housing bubble | Ivan Van de Cloot | 20 10 2009 | Page16
Stock- flow model of
housing
size of housing stock
increase inhousing stock
price of
housing
LRS
SRS1
D1
p0 p0
Q1 dQ*
S
D2
p1 p1
dQ1
SRS2
Q2
p2 p2
dQ2
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Dynamics
t0
P
Demand shock:overshooting
t0
P
Supply shock:undershooting
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Asset pricing approach:expectations matter
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OECD: Asset pricingapproach
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User cost of housing= P*(i+t+f-p)i=mortgage rate, t=tax, f= depreciation,
p=Expected capital gain
Equilibrium: rent=buy, E= P*(i+t+f-p) / = /(P E 1 i+t+f-p)So: as long as we come across exuberant
people, … (the market can stay irrationallonger than you can stay solvent, Keynes)
Expectations matter
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... It has been argued that the striking housing
price increases in some countries in recentyears were a response to the sharp decreasesin interest rates, as central banks eased theirmonetary policy stance during the downturn...Monetary policy tightening appears to have
played a role in triggering housing price bustsafter booms, as short-term rates typicallyincreased toward the end of a boom andremained high into the first year of a bust.
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Helbling (BIS)-Event study
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Helbling (BIS)-Event study
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House Prices and Monetary
Policy: A Cross-Country Study,Federal Reserve
IMF World Economic Outlook
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“The dynamic factor model/FAVAR analysis
assumes that house prices are driven byfundamentals and is not designed to test forthe existence of potential bubbles.”
“In cases where house prices may have
exceeded fundamentals— which may includeAustralia, Ireland, Spain, and the UnitedKingdom-, there is a danger that higherinterest rates could trigger a much larger
downward adjustment in house prices, withconsiderably more severe consequences forreal activity.
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IMF, World Economic Outlook,
September 2004
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- -Housing bubble | Ivan Van de Cloot | 20 10 2009 | Page25
Mortgage indebtness at
an all time high
90%
100%
Debt to disposable income