Categories Uncategorized The State of the House Price Cycle in the Euro Area Post author By Philip Lane Post date September 15, 2015 2 Comments on The State of the House Price Cycle in the Euro Area ECB bulletin article here. Related ← Bailed Out! → OECD Economic Survey: Ireland 2 replies on “The State of the House Price Cycle in the Euro Area” “The State of the House Price Cycle in the Euro Area” From the Introduction: “In a number of euro area countries, house prices had increased at unsustainable rates and to unsustainable levels prior to the crisis …” How do you gauge, measure, explain an “unsustainable rate”? The Ratio of Median Price/Median Income – for a specific region and location within that region? Might be a good start. “After some ups and downs during a protracted period of adjustment, there are now increasing signs that house prices in the euro area are finally on the rise again.” How about wages and salaries – have these ‘recovered’ their 2008 levels? Are they – ” … finally on the rise again”? And by how much have they to rise in order to restore the 1995 ratios of prices/incomes? A long, long way I reckon. “Understanding the state and nature of the house price cycle is important from both a macroeconomic and financial stability point of view.” House price cycle? This is the one economic indicator that must be avoided – or at least kept on a very tight financial leash. For reasons which appear to escape many pundits and commentators a cyclical residential property situation is symptomatic of severe internal economic strain. Residential mortgages must be situated on a rock-solid foundation: they mandate a significant, and guaranteed, future income flow on the part of the borrower. Where the the after-tax income of the borrower and the collateral value of the property both display a gradual and parallel upward trend line – rather than the large divergence that occurred from 1996 to 2000 and resumed again (with a vengence) from 2002 – 2007. A slow-down or even a halt to residential property prices is acceptable – if somewhat unwelcome. But any decline is serious and can have drastic social and economic affects – as we know from several prior episodes of ‘Negative Equity. May I assume from that third extract from the Introduction that there was, and still exists, little “understanding” about the economic nature of private residential property? Seems the Burbons may be still with us. Good report. Just read it carefully. And again the assumption that high house prices are good pervades the document. If feels like the basis of a socio-economics question… “If there were a technology or supply shock and housing were suddenly cheap, would the European economy suffer or benefit? Would Europeans suffer or benefit? Which ones? Discuss.” Comments are closed.