Beroepsvereniging van het Krediet

Union professionnelle du Crédit

Ivan Van de Cloot

Housing market in Belgium
 Talking about US Housing
bubble since 2004

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 2

 Exuberant expectations

 “The turmoil is best seen as the natural result of

a prolonged period of generalized and aggressive
risk-taking. In other words, it represents the
archetypical example of financial instability with
potential serious macroeconomic consequences
that follows the build-up of financial imbalances
in good times…overstretched balance sheets…
masked by the veneer of buoyant asset prices
and strong economic growth.”
 BIS Working Paper 251, March 2008

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 3

 Markets are not efficient
=bubbles exist

 To cope with uncertainty, people follow

conventions
 When a shock breaks down the convention,
herd behavior takes over

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 4

Prices increased more in
Belgium than in US…

Belgium

Netherlands

Britain

US

5
…much more in fact.

6
House price-income ratio
exploded in Belgium

Belgium

Netherlands

Britain

US

Japan

7
 Fundamentals?
 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

8
 Strong collateral?

 High asset prices imply strong collateral?

 Strong income flows and low interest rates keep
debt service ratios in check?

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 9

 Macroeconometric
research

 Interesting to look at “average reactions”

 = Bell Curve economics: won’t be able to detect
bubbles
 Even this conservative research: overvaluation of
Belgian real estate
IMF (2006): 17%
ING (2009): 16% probable, 44% if in line with previous
correction

10
Wages and house prices:
45% out of line

11
 -10
10
15
20
25
30
35

-5
0
5
Ireland

Netherlands

UK

Australia

France

Norway

Denmark

Belgium

12
Spain

Sweden

Italy

Japan

USA

Finland

Germany

Canada

Austria
IMF: Macroeconometric
study
 1
3
5
7
9

-3
-1
dec/59

dec/61

dec/63

dec/65

dec/67

dec/69

dec/71

dec/73

dec/75

dec/77

dec/79

dec/81

dec/83

13
dec/85

dec/87

dec/89

dec/91

dec/93

dec/95

dec/97

dec/99

dec/01

dec/03

dec/05

dec/07
interest rates
Upward shock in real
 Overvaluation measures sensitive
to choice of “equilibrium”
40,0%

30,0%

20,0%

10,0%

0,0%

-10,0%

-20,0%

-30,0%

-40,0%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

14
Belgium is not cheap if
corrected for bubbles

15
 Stock- flow model of
housing
price of
SRS1 housing
SRS2 S
p1 p1

p2 p2

LRS
p0 p0
D2

D1

Q1 Q2 dQ* dQ2 dQ1

size of increase in
housing stock housing stock

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 16

 Dynamics
P

Demand shock:
overshooting

0
t

Supply shock:
undershooting

0 t

17
Asset pricing approach:
expectations matter

18
 OECD: Asset pricing
approach

19
 Expectations matter

 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 irrational
longer than you can stay solvent, Keynes)

20
 Helbling (BIS)-Event study
 ... It has been argued that the striking
housing price increases in some countries in
recent years were a response to the sharp
decreases in interest rates, as central banks
eased their monetary policy stance during the
downturn... Monetary policy tightening
appears to have played a role in triggering
housing price busts after booms, as short-
term rates typically increased toward the end
of a boom and remained high into the first
year of a bust.

21
Helbling (BIS)-Event study

22
 House Prices and Monetary
Policy: A Cross-Country Study,
Federal Reserve

23
 IMF, World Economic Outlook,
September 2004
 “The dynamic factor model/FAVAR analysis
assumes that house prices are driven by
fundamentals and is not designed to test for
the existence of potential bubbles.”
 “In cases where house prices may have
exceeded fundamentals— which may include
Australia, Ireland, Spain, and the United
Kingdom-, there is a danger that higher
interest rates could trigger a much larger
downward adjustment in house prices, with
considerably more severe consequences for
real activity.

24
 Mortgage indebtness at
an all time high
100%
93%
90%
Debt to disposable income 89% 91%

86%
81%
80%
76%
75% 72%
73% 73%
69% 68% 70%
70%
65% 66% 64% 66%
63%

60%

50%

40%

30%

20%

10%

0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-
1

Prêts hypothécaires Autres total

Housing bubble | Ivan Van de Cloot | 20-10-2009 | Page 25