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The eurozone turns progressively the page on real estate crises


Residential real estate has played a fundamental role in the recent crises in several eurozone countries, first by fuelling unsustainable economic growth and then by triggering or exacerbating the recessions that followed. However, the importance of the role it played and its contagion channels to the rest of the economy varied significantly from one Member State to the next.

After several years of correction, these markets’ fundamentals have become, or will become, relatively healthier once again, although again with marked differences between countries, and despite the fact that all of the damage caused by the excesses of previous years has not yet been repaired. Thus, beginning this year, this sector should once again become a positive (though initially modest) contributor to economic growth in the eurozone. 

For the longer term, the crisis has triggered a growing awareness of the systemic risk caused by real estate volatility. Tools have been developed or strengthened to prevent shocks from that sector. A first category of efforts pertains to macro-prudential standards to protect banking systems and households from the consequences of excessive real estate indebtedness. There is already substantial progress being made in this arena. However, just as critical for stability and economic growth in general are the efforts to improve the decision-making process in terms of urban planning and building, so that supply can more fluidly and suitably meet demand. In this regard, it is the territorial government reforms in several eurozone countries that, if continued and properly carried out, can be the most significant sources of improvement.






Residential real estate has played a fundamental role in the recent crises in several eurozone countries, first by fuelling unsustainable economic growth, and then by triggering or exacerbating the recessions that followed. However, the importance of the role it played and its contagion channels to the rest of the economy varied significantly from one Member State to the next. After several years of adjustment, this role should gradually become positive again, although, here as well, national situations differ substantially. Moreover, drawing lessons from the crisis, the eurozone is gradually strengthening its measures aimed at avoiding further systemic shocks coming from this sector.

Very marked real estate price cycles in recent years (except in Germany), but very different economic consequences from one country to the next

The table below contains some key figures on housing price trends and the change in their valuation (compared to incomes and rents) during the years leading up to the crisis, and since then (figures for the five largest eurozone economies, plus Ireland given the dominant role played by real estate in the difficulties Ireland has faced).


The second table shows how the degree of exposure of the economy as a whole to the state of the residential real estate market varies markedly from one country to the next and how, within each of them, it has changed over time. Indeed, jobs in construction, the weight of household debt (likely to put households and banks under pressure if there is a negative price trend), the importance of taxes on real estate for public finance, and the percentage of home ownership (which is likely to amplify the link between housing prices and consumption via the “wealth effects” acting upon consumer confidence) are among the main channels for spreading the vigour of the real estate market to economic growth in general.


These numbers illustrate the following:

  • In Spain and Ireland, two countries where typical real estate bubbles that relied on a significant increase in construction and excessive household debt had been forming since the end of the 1990s, the disruption of these unsustainable trends was the leading cause that triggered the financial crises. The abrupt slowdown in construction also had a major impact on employment and public finance.
  • In the Netherlands, where the price of housing also rose significantly, supported by large levels of household debt aided by tax incentives, the decline that followed did not, for all that, trigger a meltdown of the banking system, which was relatively well protected against such a risk. Furthermore, because rising prices were not accompanied by an increase in construction as large as that in Spain and Ireland, the decline had less of an effect on employment. In contrast, this decline had a major negative impact on growth through other factors, especially consumption, due to more prudent behaviour by highly indebted households.
  • In France and Italy, the increase in prices, which was rather steep in the early 2000s, was not accompanied by excessive household debt. In addition, it was not a major factor of damage to the banking systems. However, the crisis led to a drop in construction that weighed heavily on GDP and the labour market (although less than in Spain or Ireland, as this sector’s precrisis expansion was significantly smaller than in both of those countries).
  • Finally, in Germany, which was unique in that there was no significant increase in housing prices in the years preceding the crisis, residential real estate was not one of the triggers nor a major aggravating factor of the crisis, as prices and construction have on the contrary increased modestly since 2008-2009.

In 2015, the climate is more positive (or less negative)

After several years of adjustment in the countries that had witnessed large house price increases, the potential for residential real estate to contribute to economic growth (either directly, through construction, or indirectly, through a rebound in prices that boosts consumer confidence) is now becoming more positive (or less negative) than in previous years, while remaining markedly different from one country to the next. Generally, this improvement stems from factors common to the entire region:

The improved solvency of buyers due to the price decreases of recent years (except in Germany), while the recent depreciation of the euro also has increased the appeal held by the region’s markets for international investors.

The economic recovery underway since mid-2013, which has been showing signs of accelerating since the end of 2014.

The European Central Bank’s highly proactive monetary policy, which makes low interest rates possible while also improving the sustainability of household debt left over from the previous decade (at least in the countries where such debt was primarily incurred at variable interest rates).

However, each of these countries still has a very specific context

In Germany, despite an already positive trend, the pace at which prices (up 4.6% at the end of 2014 compared to the end of 2013) and construction (up 1.7% in real terms over the same period) are increasing remained disappointing last year, combined with a mid-year slowdown of the wider German economy. However, things will probably speed up in 2015. A particularly low unemployment rate (4.8%), higher wages (up 1.8% at end-2014 compared to end-2013), high immigration, the low home-ownership rate and still-affordable prices (except in some magnet cities, where the risk of local bubbles is regularly stressed by the Bundesbank) are expected to play a positive role. Furthermore, the German real estate market is becoming a safe-haven investment for certain international investors. The possibility that the government will further limit the rent increases landlords are allowed to impose may discourage investment slightly, without being enough to halt the positive momentum. While Standard & Poor’s (S&P) expects prices to increase by 5% in 2015 and 3.5% in 2016, the contribution made by construction to GDP and employment is likely to increase.

In the Netherlands, prices and construction, which were still falling in 2013, already bounced back in 2014 (up 5.9% to 10.7% respectively over four quarters). This is despite less favourable tax treatment for mortgages (limiting the amount deductible for interest on instalment loans), household debt that remains the highest in the eurozone (114% of GDP) and a high percentage of households (about one in three) that are underwater on their mortgages. The improvement in the labour market and the relatively strong economic recovery are expected to keep this rebound going in 2015. It should also get a boost from looser governmental regulations regarding rents in the large social housing sector. While further tightenings of rules on mortgages (particularly regarding the loan-to-value ratio) could be a negative factor over the short term, they should also help ensure a sustainable rebound for this sector, preventing the formation of future bubbles. S&P expects values to rise by 1.5% in 2015 and 2.5% in 2016, while the contribution of construction to GDP will once again be positive in 2015.

In France, prices and construction fell in 2014 (by 2.1% and 3.9% respectively over four quarters). However, the correction in prices, which started rather late (the peak was hit in the first quarter of 2011), currently remains much more modest than in other countries where prices rose substantially in the 2000s. Because of this, the price-to-rent and price-to-income ratios remain well above their long-term averages. This situation can be explained by significant regulatory barriers to construction in high-demand regions, which have the effect of boosting prices and increasing household debt. Although still at a reasonable level, household debt has continued to climb during the crisis (it rose from 46% to 55% of GDP between Q1 2008 and Q3 2014), even though residential construction brought a negative contribution to economic growth (-0.2pp in 2014). Although it appears that prices must correct even further for the sector to return to stability (particularly given that the labour market still has not improved), in 2014 the government announced several tax and regulatory measures aimed at boosting construction (in fact, sales of new homes were higher than expected in Q1 2015). Combined with the effect of the general economic improvement, these efforts could help the contribution of residential construction to GDP and the labour market to become at least less negative, if not positive, in 2015 vs. 2014, despite the ongoing drop in prices (which S&P expects to fall by 3% in 2015 and 0% in 2016).

In Italy, prices (which decreased by 2.6% in the first three quarters of 2014) and construction (a drop of 2.5% for all four quarters of that year) are maintaining their downward momentum. The economic environment, which remains severely depressed (four quarters of negative or zero growth in 2014 before a small rebound only in Q1 2015), and the lack of improvement in the labour market remain negative factors. However, when we take into account that the drop in prices over the last few years was higher than in France, price-to-income and price-to-rent are currently near their long-term averages. Most of the consolidation has probably already taken place and household debt remains rather modest (the lowest in the eurozone, at 42.9%). Yet, while economic improvement is expected to remain slow in 2015, prices could still drop slightly further (S&P forecast: a 2% drop in 2015 followed by a 1% increase in 2016) while construction is expected to stabilise.

In Spain, construction, which was still falling fast in 2013 (-8.2% over four quarters), began a modest recovery in 2014 (+2.1%), while prices practically stabilised (falling by only 0.2%). After the very substantial consolidation of the last few years, price-to-income and price-to-rent are now much closer to their long-term averages, while the percentage of GDP represented by residential construction is now lower than in Germany or France. Residual household debt, although still high, has nonetheless decreased significantly (it fell from a high of 84.5% of GDP to 71.8% in Q3 2014) and has clearly become more sustainable once its structure (variable interest rate) has been taken into account. The drop in unemployment (which has been rather steep, despite starting at very high levels), the continuation of a faster-paced economic recovery than the rest of the region’s, and international investors’ interest for this now much more affordable market are all factors that are expected to result in a continuation of the rebound in construction, which should make a slightly more significant contribution to GDP in 2015. Meanwhile, prices are also expected to start recovering (S&P forecast on pricing: 0% in 2015 and +2% in 2016).

In Ireland, prices and construction have already bounced back significantly since their lowest points (construction has climbed 38% since Q4 2012 while prices have risen +23.4% since Q1 2013, with increases of 16.8% and 16.2% respectively in 2014 alone). Although levels remain well below their pre-crisis highs, given the extent of the crash in 2008-2012, this situation raises concerns that another bubble may be forming, especially in Dublin, particularly given that household debt, although significantly reduced, remains high (falling from 123.6% to 85.8% between Q4 2009 and Q3 2014). As a result, in 2014 the Central Bank of Ireland tightened its measures intended to limit the risk on new loans. Significantly, European institutions have encouraged the country to increase the supply of new homes in the capital in order to ease the pressure on pricing. The rebound in prices should continue at a slower but still substantial pace in 2015 (S&P forecast: +9% in 2015 and +5% in 2016), while the recovery in construction, boosted by the clear improvement in the Irish economy, is expected to remain strong.

Thus, in all of the countries we have considered, residential housing is expected to make either a positive contribution (in Germany, the Netherlands, Spain and Ireland) to growth, or at least a less negative or virtually zero contribution (in France and Italy), starting this year. The sector is therefore expected to participate in improving the overall economic situation, though modestly at first. Prices and construction are expected to move in the same direction even though, in some countries with strong regulatory constraints on high-demand areas (France or even Ireland), measures intended to increase supply may accentuate the decline in prices or limit their rise. In all, we estimate that the contribution of residential construction in these six countries to the eurozone’s GDP should be between 0.1 and 0.2 pp in 2015 and a little more in 2016 (after a virtually zero contribution in 2014 and a negative one in 2013).

The eurozone is strengthening its capacity to control systemic risk originating from the housing sector

The improved outlook in residential real estate poses the question of the risk of new bubbles forming, a risk that is already clearly visible in Ireland (as well as in some close eurozone neighbours such as the United Kingdom and Nordic countries). Such a scenario seems more distant for the other Member States, but must nonetheless be considered, since the crisis years did not fully restore market fundamentals everywhere (as evidenced by the still-insufficient consolidation of prices in France and the insufficient reduction in household debt in Spain, Ireland and the Netherlands).

Residential real estate remains, by essence, a source of systemic risk, due to those factors already mentioned: high rates of indebtedness incurred for acquisition and construction by households as well as numerous institutional players; frequent concentration of households’ asset risk on a single asset; weight of this sector on the job market and on the tax resources of certain governments (in addition to its heavy emotional load, which often makes decisions to limit excessive house price increases politically difficult). However, political and monetary authorities, drawing lessons from the crisis, have strengthened their tools to control these risks.

The first response is at the level of regulation and financial supervision. The Bundesbank’s warnings and, most importantly, the tightening of regulations on lending in the Netherlands and Ireland also demonstrate responsiveness and much greater vigilance than what was seen over the previous decade. Should prices and indebtedness once again rise significantly in other countries, it is highly likely that measures of this type would be reinforced, since attempting to limit real estate excesses via monetary policy alone could be harmful to the rest of the economy.

These so-called “macro-prudential” measures are of two types. 1/The limits imposed on the banking system’s exposure to real estate debt, via the various ratios that may be imposed on them, whether by their national authorities or, now, by the ECB in its new mission as common supervisor for the European Banking Union. 2/The limits set on household indebtedness, which, for the time being, are the purview of national authorities (although voices are being raised to better coordinate national policies in this arena, see a Working Paper by the ECB entitled Real estate markets and macroprudential policy in Europe, published in May 2015).

At the present time, residential real estate is also a more closely-watched factor in terms of general macro-economic stability. Remember that housing prices is now one of 11 indicators (which also include trends private debt levels and flows) being tracked within the framework of  the European Commission’s MIP (Macroeconomic Imbalance Procedure)scoreboard implemented since December 2011; any variation of more than 6% (up or down), in real terms, is now considered an imbalance to be corrected.

However, although past excess indebtedness is partly the result of inadequate financial and macro-economic oversight, it is also the product of the often dysfunctional character of the real estate markets themselves, frequently due to political or administrative deficiencies. Thus, of all the lessons from the crisis, it is probably the government’s reforms that offer the greatest potential to make residential real estate a more stable growth driver in the future.

Over the long term, the most influential responses to real estate volatility will come from administrative reforms: creating greater fluidity in how real estate supply can respond to demand

The main source of real estate volatility, is, above all, the harsh adjustments caused by the inability of supply to fluidly respond to both growth and reduction in demand, whether due to regulatory restrictions weighing on construction in the tensest zones or, on the contrary, excessive, prolonged development of construction in regions with few buyers or renters.

This inability of supply to easily respond to demand is probably largely explained by how the market’s essential commodity, building land, far from being solely the result of market forces, is, above all, the product of administrative urban planning decisions that are often complex, in  which participate several categories of players with frequently contradictorygoals, where conflicts of interest are many, and where transparency problems are not exceptional. Local administrations have assuredly played an important role in the erratic behaviour of recent years, because they themselves drew a large portion of their revenues from real estate development (or the very volatile proceeds of taxes on real estate transactions) and because they answered to local electorates or interests, often more than to the general issues of housing at the larger national levels.

Reforming these processes is a difficult political exercise. However, in several countries of the eurozone (especially Spain, Italy and France), the crisis did give rise to reforms, which are still being implemented, that influence the balance of power between the central government and the different levels of local government. Certainly, these reforms are coming up against stiff resistance, which seems especially strong when their ambition is to eat into the prerogatives of local players in matters of urban planning and building (as, for example, in France, where in terms of inter-municipal or greater Paris projects, there have been attempts, largely unsuccessful to date, to reduce the powers of those municipalities in such matters). However, these efforts continue and it is they that, by offering the prospect that real estate supply will meet demand more quickly and more suitably, likely have the greatest potential to reduce the economically, financially (and socially) disruptive nature of real estate fluctuations. Though the political obstacles are substantial, the feedback from the crisis years and the recognition of the dangers generated by real estate volatility should still, gradually, make way for changes in this game.



























The economic recovery, accommodative monetary policy and improved solvency of buyers are creating a more promising environment
















Over the short term, the risk of forming new “bubbles” seems low
















Residential real estate remains, in essence, a systemic risk factor










Administrative reforms are having an even greater impact than macro-prudential measures




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PERRIER Tristan , Global Views Analyst
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The eurozone turns progressively the page on real estate crises
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