Home > Uncategorized > Graph of the month: EU and EZ Ratio of a House Price Index to rents (Eurostat)

Graph of the month: EU and EZ Ratio of a House Price Index to rents (Eurostat)

We didn’t see it coming, the Great Financial Crisis. But since yesterday it has become slightly more difficult to miss such events. Eurostat published (among other things) an EU and EZ ratio house price/rent ratio. Read all of it the parts on methodology and policy implications. Quote: ” The (national, M.K.) alarm threshold adopted in the context of the MIP is 6 % of annual growth rate in the deflated HPI (House Price Index, M.K.).   But even on the European level such increases clearly show in the 2005-2007 period (see the Eurostat publication linked). An average increase which is of course connected to house price bubbles in Spain and Ireland and the Baltic states and the Netherlands and the connected increases in deficits on the current accounts (not in the Netherlands, by the way, see below). At this moment, we should of course not miss out on the present ‘debt deflation’ – in a sense the Eurozone is brought down by piles of bricks.

Graph 1. Ratio of House Price Index to actual rents – Index levels 2010 = 100


The connection between high house prices and consumption is investigated in this report from the Central Bank of Ireland: House equity withdrawal trends in Ireland. When house prices rise people feel rich, despite the fact that this is not caused by increases in income and production. House price illusion instead of money illusion. This makes them consume more, facilitated by bank lending, which adds to an economic boom which often  leads to a deterioration of the current account (look at graph 1 and 9 here). The question is of course why this did not happen in a country like the Netherlands, which witnessed entirely comparable developments of equity withdrawal. No, that’s not true – equity withdrawal in the Netherlands was even higher. Part of this can be explained by high pension savings, another part by company savings (i.e.: retained earnings which were not invested). The present Dutch problems: savings are still high – but equity withdrawal and comparable lending has stopped. With a quite severe slump as a consequence. Denmark is in a comparable situation, though this country also suffers from a high exchange rate.

  1. February 1, 2013 at 7:52 pm

    Unfortunately, only a small number of analysts and economists are tracking property markets in a manner that fully explains the situation. Any qualified property appraiser knows that no country has experienced a “housing” crash; what crashes first are land markets. The reason is that land markets are driven by speculation, and speculation is heightened by the easy availability of cheap credit. Of course, when a very overheated property market finally crashes (i.e., when potential homebuyers can no longer afford to pay asking prices and carry the high level of mortgage debt and when business can no longer afford to pay what landlords demand in rent and still remain profitable), anything resembling a normal market operating near equilibrium disappears. In the areas most seriously affected by unemployment, properties cannot be sold at any price because potential buyers expect property prices to continue to fall. Deep recession does remove the speculative pricing from the land market but the costs in terms of lost business activity and rising unemployment of labor and capital goods is long-lasting. That these boom-to-bust cycles can be avoided is not well-appreciated within the community of economists; and, those economists who have offered sound advice have found little political support because of the political influence of those who profit most by speculation-driven but highly dysfunctional property (i.e., land) markets.

    • Si
      February 4, 2013 at 8:16 am

      Spot on Edward!

      The link you make between “sound advice” and “little political support” is well made, and in my thinking plays the pivotal role. No-one loves a party pooper and trying to call ‘enough’ when the party is in full swing is impossible. Too many vested interests. In one sense it is the classic ‘pump and dump’ with a smile and a nod from the banks, developers, politicians……

  2. February 3, 2013 at 7:41 am

    I made a couple of Infographics on the development of the Spanish and French house prices. Based on data from the INE (Instituto Nacional de Estadistica) and the INSEE (Institut national de la statistique et des études économiques)

    Here are the links:



  3. henry1941
    February 3, 2013 at 10:31 pm

    Pull out the land value element of house prices and track that instead. We are not talking about the prices of the bricks and mortar, which are stable, but of the underlying land. When the value of the buildings and structures are taken out of the calculation it becomes evident that things are much worse and even more volatile.

    Incidentally why not just look at the house prices/rental ratio? When the net yield drops below a threshold level of probably around 4% the whole system is unstable.

    • merijnknibbe
      February 4, 2013 at 2:36 am

      For the record: I did look at prices of wages/material on one side and prices of new houses including land at the other side for the Netherlands – which indeed shows this pattern (corrected for the price level).

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