Friday, October 12, 2007

Rational Animals

I like this piece from Martin since it is reasonably parsimonious in the way it uses rational forsight.

The question remains “How rational do agents have to be in order to incorporate the output increases observed in the 1990s into the price of bonds being traded in the 1970s?” Do the agents need to have a demographic model like the one presented in this paper in order to anticipate the change in output? The answer is no. Individual agents simply looks forward to their own path of lifetime labor income. The agents in the model know their life time working hours and realize that their highest output years are yet to come. They realize that in the future their own household output per person will rise (their children becoming adults). Therefore, each agent wishes to borrow against these future increases in wealth. Unfortunately for them, the shock that they face turns out to be aggregate — their cohort goes to the bond market with them and interest rates rise. This is simply the flip side of why interest rates are low now.

Assett Transfers Over Time.

Robert Martin Says:

When the size of the working age population is temporarily high as it is now, output is temporarily high and households wish to transfer assets to the future. Because ability to do so is limited2 , there is upward pressure on real asset prices — house prices rise, interest rates fall.3 The increase in house prices occurs now despite the certain knowledge that once the baby boomers retire real house prices will fall.

Any individual agent can transfer output over long periods of time by trading long lived bonds. Thirty year bonds exist and exhibit fairly liquid markets. However, to undo the effects in the model real output must be physically transferred from today to the future. As the demographic shocks discussed in this paper occur over 30 to 50 year intervals, it is difficult to think of a real asset capable of making this transformation. Think of real capital and assume it depreciates at a mere 5 percent per year. Almost 80 percent of the capital is consumed by depreciation over the 30 year period. On a discounted basis over 95 percent of the capital is eroded.It is in this sense, that the ability to transfer assets to the future is limited.

This is the core of the problem.

Saturday, September 15, 2007

Determinants of house prices in central and eastern Europe

Determinants of house prices in central and eastern Europe

by Balázs Égert and Dubravko Mihaljek


Working Papers No 236
September 2007


This paper studies the determinants of house prices in eight transition economies of central and eastern Europe (CEE) and 19 OECD countries. The main question addressed is whether the conventional fundamental determinants of house prices, such as GDP per capita, real interest rates, housing credit and demographic factors, have driven observed house prices in CEE. We show that house prices in CEE are determined to a large extent by the underlying conventional fundamentals and some transition-specific factors, in particular institutional development of housing markets and housing finance and quality effects.

Sunday, July 15, 2007

Notes 3

From Hot and Cold Housing Markets: International Evidence

Jose Ceron, Omega Capital and Javier Suarez CEMFI, CEPR and ECGI

The studies by Englund and Ioannides (1997), Capozza et al. (2002), Tsatsaronis and Zhu (2003), and Borio and Mcguire (2004), among others, report significant correlations between real housing price growth and variables such as real GDP, unemployment, interest rates, and inflation, which suggests that property prices might feature a cyclical pattern, if only because of the convolution of the cyclicality of the other variables. Finally, swings in housing prices have been shown to be positively correlated with the volume of transactions (Stein, 1995) and negatively correlated with average selling times (Krainer, 2001).

Saturday, July 14, 2007

Monday, July 9, 2007

Construction and Housing in Ireland

Construction and Housing in Ireland
Published by the Stationery Office, Dublin, Ireland.


This report presents an overview of the Irish construction industry. The information is sourced from statistics compiled by the Central Statistics Office, from other producers of construction statistics and from administrative data sources. The report aims to present a comprehensive picture of the Irish construction industry and also includes some international comparisons.

• In 2005, it was estimated that the value of output in the construction industry was almost €32 billion. This compares to €17.6 billion in 2000.
• In 2005 construction was estimated to have accounted for 20% of Gross Domestic Product or 23% of Gross National Product.
• Residential construction output more than doubled from €9.5 billion in 2000 to €20.9 billion in 2005.

• Average hourly earnings in construction increased from €11.44 per hour in the second quarter of 2000 to €17.31 per hour in the same period of 2005.
• The average number of hours worked in construction has decreased from 45.6 hours per week in the second quarter of 2000 to 43.8 hours per week in the same period of 2005.
• Employment in construction has grown by 46%, increasing from 166,200 in the second quarter of 2000 to more than 242,400 in the same period of 2005.
• Approximately 1 in 8 people (12.6%) employed in Ireland work in construction. This is the highest ratio in the European Union.

• Over 86,000 dwelling units were completed in Ireland in 2005. This compares to less than 20,000 completed in 1990 and 50,000 in 2000.
• New dwellings were completed at a rate of 21 units per 1,000 of population in 2005; and added over 5% to existing housing stock.
• Close to half of the units completed in Ireland in 2004, the latest year for which data is available, were semi-detached houses. This compares to about 30% in 2000.
• In the April 2006 Census of Population, the CSO identified a total of 1.8 million private residences and communal establishments throughout the State. Of these, about 275,000 were vacant at the time of the Census.

• The average price of a new house in Ireland was just over €272,000 in 2005. A secondhand hand house cost on average more than €330,000.
• More than a third (34.3%) of all dwellings sold in 2005 cost in excess of €300,000.
• In 2000, the cost of servicing a 90% mortgage over 20 years to buy a new house (based on the average national price of a new house and prevailing interest rates) would have been €1,021. The equivalent for a new house purchased in 2005 was a monthly repayment of €1,395.
• The cost of building and construction materials increased by 24% between 2000 and 2005. By comparison average house prices increased by 64% over the same period.

• The total value of mortgage debt has increased from less than €33 billion in 2000 to almost €100 billion at the end of 2005. Mortgage debt increased by almost €22 billion in 2005.

• The average size of a new mortgage has almost doubled from €102,300 in 2000 to €200,000 in 2005.
• Variable rate mortgages represented 83% of total outstanding mortgage debt in 2005.
• In 2000, less than 5% of new mortgages were for more than €200,000 but almost half of mortgages taken out in 2005 (46.9%) exceeded this value.

• In 2005, planning permission was granted for the construction of 55,000 multi-development houses, 21,000 one-off housing units and 24,000 apartments.
• The average floor size for houses granted planning permission in a multi-unit development was 125m2. For one-off houses the average floor area was 214m2.
• The amount of zoned serviced land for residential construction has increased from 10,800 hectares (with a potential for over 263,300 units) in 2000 to almost 14,800 hectares (with a potential of almost 460,000 units) in 2005. The potential housing density of this available land increased from 24 units per hectare in 2000 to more than 31 units per hectare in 2005.

• The Dublin region accounted for 34% of total construction output in 2000 and for less than 28% in 2004.
• In the second quarter of 2005 there were over 242,000 workers in the construction sector. Of these, almost 53,000 lived in Dublin while 37,500 lived in the South-West.
• According to the DEHLG, the average price of a new house in Dublin was €386,000 in 2005. A new house in Galway cost €275,000 and in Cork €265,000.
• Almost one in every three dwelling units completed in 2004 were located in Dublin or the Mid-East region.

• Ireland's house completion rate in 2005 (21 units per 1,000 of population) was four times the average for other European countries.
• In Ireland 77% of homes are owner-occupied. Hungary, Spain, Slovakia and Norway had higher ownership rates. In contrast to this, 45% of German homes and 35% of homes in Switzerland are owner-occupied.
• Construction output per capita is highest in Ireland at approximately €7,600 in 2005. This is more than double the corresponding figure for the United Kingdom.

The value of output in the construction industry increased from under €18 billion in 2000 to an estimated level of just under €32 billion in 2005. This was an increase of 79% over the five years or an annual average of over 12% per annum. The largest annual percentage increase was in 2004 when output increased by almost 16%. Over the period 2000-2005 the volume of activity increased by 30%, when price changes are excluded.

The primary growth areas in the industry have been the residential sector followed by infrastructure development. The value of residential construction output has more than doubled from €9.5 billion in 2000 to just under €21 billion in 2005. In the same period, the value of non-residential output had decreased by approximately 10%. Total output in productive and social infrastructure increased by €3 billion or 70% between 2000 and 2005. The increase in residential construction accounted for over 80% of the total growth in the value of construction output between 2000 and 2005.

By the first quarter of 2006 the construction industry employed in excess of 250,000 people. Many of these work in small enterprises or are self-employed. The structure of the industry makes it difficult to conduct a full census of building and construction firms. The CSO's annual census only covers firms with 20 or more persons engaged. There were 376 such firms in Ireland in 1997 and this number had grown by more than 80% to a total of 682 enterprises in 2003, the latest year for which data are available. The number of persons engaged by these firms grew by more than 90% from just over 29,200 in 1997 to more than 56,600 in 2003. Total turnover has almost trebled in the same period from just over €3.6 billion to more than €10.3 billion. The average turnover of these firms increased from just over €9.6 million in 1997 to more than €15 million in 2003.

In the second quarter of 2005, construction workers earned an average of €17.31 per hour. This was 51% higher than in the same period of 2000. The highest paid occupational groups were foremen & supervisors (earning €21.76 per hour in 2005) and skilled operatives (€20.24 per hour). Unskilled and semi-skilled workers on adult rates earned €15.92 per hour and apprentices earned €11.63 per hour.

Looking at average weekly earnings, which depend on hours worked and hourly wages, employees in the construction sector earned €758 per week in the second quarter of 2005. This was €236 per week higher than in 2000. Weekly earnings in construction were higher than in industry (€578 per week) but lower than in the public sector (€838 per week, excluding health). Between 2000 and 2005, average weekly earnings in construction increased by 45%, while weekly earnings in the public sector grew by 39% and in industry by 33%.

In the second quarter of 2005, there were 15.5 million people employed in construction in the European Union. As mentioned earlier, the construction sector accounted for one in every eight jobs (12.6%) in Ireland. This was the highest percentage in the EU. Across all 25 Member States, 7.9% of the workforce was involved in construction. In Spain, 12.4% of employment was in the construction sector, in Cyprus 11.8% and in Portugal 10.7%.

Construction as share of total employment 2005 - Q2

Much of the demand for labour in the construction sector in Ireland has been met by workers from the Accession States which joined the EU in May 2004. Tentative estimates from the QNHS indicate that there were 25,300 non-Irish nationals working in the construction sector in the fourth quarter of 2005. Of these, 5,000 were from the United Kingdom, 15,200 from the EU Accession States and 5,100 from other countries. About a quarter of persons from the EU Accession States working in Ireland were employed in the construction sector at the end of 2005. These estimates of the workforce by nationality are tentative, based on sample survey estimates which are subject to revision in the light of more comprehensive statistics which will be compiled from the 2006 Census of Population.

Ireland has a high level of house building relative to the size of its population. In 1990, just 5.6 houses and apartments were completed per 1,000 of population; by 2005 this ratio had increased to 20.9 per 1,000. Chapter 11 presents corresponding data for other European countries.

The Census of Population is one of the most important sources of information on households and on the stock of housing. During the course of the April 2006 census, the CSO enumerators identified a total of 1.8 million private residences and communal establishments throughout the State. They delivered blank census questionnaires to 1.5 million dwellings that were expected to be occupied on census night. Approximately 275,000 residences were vacant at the time of the census while in the remaining cases the household was either enumerated elsewhere or temporarily absent from the State.

The DEHLG also produces an estimate of the total housing stock in Ireland. The estimate which is derived by annual updating of the Census of Population figures, indicated that there were about 1.69 million dwelling units in the State in 2005. This figure is subject to revision by DEHLG in light of the April 2006 census figures.

In 2000, the average price of a new house was €166,200. By 2005, this had increased by 64% to €272,000. Over the same period, secondhand house prices increased by 74%, from €190,200 in 2000 to €330,300 in 2005. Between 2004 and 2005, new house prices increased by 11.1% and secondhand prices increased by 12%.

With the exception of 2001, new apartment prices have increased steadily in the past number of years. The average price of a new apartment in 2000 was €205,700. The corresponding figure in 2005 was €293,200, an increase of 43%. The average price of a secondhand apartment grew by 68% in the five years, from €196,900 in 2000 to €330,800 in 2005.

Taking the average new house price of €166,155 in 2000, a “typical” 90% mortgage over 20 years would have resulted in a monthly repayment of €1,021. This is an illustrative repayment figure generated by the CSO. Between 2000 and 2005, the average price of a new house increased to €272,034 while the average interest rate for the year changed from 5.4% to 3.3%. The combined effect of these changes was that a 90% mortgage on an average new house purchased in 2005 would have required a monthly repayment of €1,395. The corresponding monthly repayment figures on a 35-year 90% mortgage were €794 for a new house purchased in 2000 and €984 for an average new house bought in 2005.

The Wholesale Price Index (WPI) includes a sub-index measuring general price trends for building and construction materials. In addition the DEHLG also produces an index of house building costs. The WPI shows that the cost for all building materials has increased by 24% since 2000. Much of this increase took place in 2004 and 2005. Structural steel and reinforcing metal have shown a 56% increase between 2000 and 2005; while ready mixed mortar and concrete increased by 12% over the period. The house building cost index rose by almost 33% over the same five-year period while house prices increased by 64%.

The DEHLG affordability index aims to measure the percentage of net household income typically used to service a mortgage. The index is calculated on the basis of the monthly mortgage payment for a 90% loan on an average new house over twenty years, as a percentage of the net income of a two-earner household on average wages. A higher percentage indicates that home ownership is less affordable. In 1994, mortgage payments calculated on this basis represented 21% of monthly income for a two-earner household. In Dublin, mortgage payments represented 23% of income. By 2005, the national affordability indicator had increased to 27% of net household income. In Dublin, it had increased to 35% of income.

Saturday, July 7, 2007

House Prices, Interest Rates and Macroeconomic Fluctuations: International Evidence Christopher Otrok and Marco E. Terrones

This paper studies the dynamic properties of international house prices, stock prices, interest rates and macroeconomic aggregates in industrial countries. While the dynamics of stock market returns and interest rates have been studied previously, we use a new dataset to gain insight into both the comovement of house price across industrial countries and the relationship between the fluctuations of house price with the fluctuations of financial asset returns and macroeconomic aggregates. Despite the fact that housing is the quintessential nontradable asset, we find a large degree of synchronization or comovement in the growth rate of real house prices in industrialized countries. We then show that much of this comovement can be related to a common dynamic component in interest rates across these countries. While we confirm the existence of a great degree of comovement in macroeconomic aggregates (namely, real output, consumption, and residential investment), we find little evidence that these aggregates are important sources of house price fluctuations. Instead, we find that house prices have an effect on macroeconomic aggregates. Given the important role that interest rates play for asset prices and macroeconomic fluctuations in industrial countries, we examine the role of monetary policy shocks--both domestic and global--in driving movement in these variables using an identified VAR augmented with our latent factors. We find evidence of a strong but delayed impact of U.S. monetary shocks on housing price growth both in the U.S. and internationally. We also document differences in the response of the U.S. economy and the global economy to these shocks.

rates. In this paper we contribute to the effort of bridging these two strands of literature and study the inter-relationships in the degree and nature of comovement across both macroeconomic aggregates and asset returns.2 Included in our list of asset returns is the growth rate of real residential house prices.

Housing activities account for a large fraction of GDP and households’ expenditures in industrial countries. Moreover, housing is the main asset5 and mortgage debt the main liability held by households in these countries, and therefore large house price movements, by affecting households’ net wealth and their capacity to borrow and spend may have important macroeconomic implications. From a global perspective, housing is the quintessential nontraded asset yet, as we document in this paper, there is a surprising degree of synchronization in the changes in the price of this asset across industrial countries. In fact, the degree of comovement is on par with the magnitude of comovement in both financial asset returns (essentially frictionless) and macroeconomic aggregates (slowed only by trade frictions).