jones (ed.) - challenges of the housing economy; and international perspectives (2012)

Challenges of the
Housing Economy
Jones_ffirs.indd iJones_ffirs.indd i 2/7/2012 10:25:25 AM2/7/2012 10:25:25 AM
Edited by
Colin Jones
Professor of Estate Management
Institute for Housing, Urban and Real Estate Research
Heriot-Watt University
Michael White
Professor of Real Estate Economics
School of Architecture, Design and the Built
Environment
Nottingham Trent University
Neil Dunse
Reader in Urban Studies
Institute for Housing, Urban and Real Estate Research
Heriot-Watt University
Challenges of the
Housing Economy
An International Perspective
A John Wiley & Sons, Ltd., Publication
Jones_ffirs.indd iiiJones_ffirs.indd iii 2/7/2012 10:25:25 AM2/7/2012 10:25:25 AM
This edition  rst published 2012
© 2012 by John Wiley & Sons, Ltd
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Library of Congress Cataloging-in-Publication Data
Challenges of the housing economy : an international perspective / [compiled by]
ColinJones, Michael White, Neil Dunse.
p. cm.
Conference proceedings.
Includes bibliographical references and index.
ISBN 978-0-470-67233-4 (hardcover : alk. paper)
1. Housing–Prices–Congresses. 2. Real estate business–Congresses.
3. Real property–Ownership–Congresses. 4. Global Financial Crisis, 2008–2009–Congresses.

5. Housing policy–Congresses. I. Jones, Colin. II. White, Michael. III. Dunse, Neil.
HD7286.C43 2012
333.3–dc23
2011045311
A catalogue record for this book is available from the British Library.
Set in 10/13pt TrumpMediaeval by SPi Publisher Services, Pondicherry, India
1 2012
Jones_ffirs.indd ivJones_ffirs.indd iv 2/7/2012 10:25:25 AM2/7/2012 10:25:25 AM
Acknowledgements
The chapters of this book are selected from papers presented at a symposium
organised by the editors and generously funded by the Royal Institution of
Chartered Surveyors (RICS) and held in September 2010 in Edinburgh.
It brought together a small number of experts from around the world to
examine recent housing market trends and to share international experiences
and policies. There were a number of interrelated themes: the challenges
faced by policy makers following the post-credit crunch world and the impli-
cations for households, construction, the housing market and the economy.
Twelve papers have been selected for this volume from the original twenty-
one, to create a focused but comprehensive analysis of these themes andalso
to provide a worldwide perspective. We are grateful to the other participants
for their comments on the original papers.
Jones_ffirs.indd vJones_ffirs.indd v 2/7/2012 10:25:25 AM2/7/2012 10:25:25 AM
The Royal Institution of Chartered Surveyors is
the mark of property professionalism worldwide,
promoting best practice, regulation and consumer
protection for business and the community. It is
the home of property related knowledge and is an
impartial advisor to governments and global
organisations. It is committed to the promotion
of research in support of the efficient and effec-

tive operation of land and property markets
worldwide.
Real Estate Issues
Series Managing Editors
Clare Eriksson Head of Research, Royal Institution of Chartered
Surveyors
John Henneberry Department of Town & Regional Planning, University
of Sheffield
K.W. Chau Chair Professor, Department of Real Estate and
Construction, The University of Hong Kong
Elaine Worzala Director of The Richard H. Pennell Center for Real
Estate Development, Clemson University
Real Estate Issues is an international book series presenting the latest
thinking into how real estate markets operate. The books have a strong
theoretical basis – providing the underpinning for the development of
newideas.
The books are inclusive in nature, drawing both upon established tech-
niques for real estate market analysis and on those from other academic
disciplines as appropriate. The series embraces a comparative approach,
allowing theory and practice to be put forward and tested for their applica-
bility and relevance to the understanding of new situations. It does not seek
to impose solutions, but rather provides a more effective means by which
solutions can be found. It will not make any presumptions as to the
importance of real estate markets but will uncover and present, through
the clarity of the thinking, the real signi cance of the operation of real
estate markets.
Jones_ffirs.indd viJones_ffirs.indd vi 2/7/2012 10:25:26 AM2/7/2012 10:25:26 AM
Greenfields, Brownfields & Housing
Development
Adams & Watkins

9780632063871
Planning, Public Policy & Property Markets
Adams, Watkins & White
9781405124300
Housing & Welfare in Southern Europe
Allen, Barlow, Léal, Maloutas & Padovani
9781405103077
Markets & Institutions in Real
Estate & Construction
Ball
9781405110990
Building Cycles: Growth & Instability
Barras
9781405130011
Neighbourhood Renewal & Housing
Markets: Community Engagement
in the US and UK
Beider
9781405134101
Mortgage Markets Worldwide
Ben-Shahar, Leung & Ong
9781405132107
The Cost of Land Use Decisions: Applying
Transaction Cost Economics to
Planning & Development
Buitelaar
9781405151238
Urban Regeneration & Social
Sustainability: Best Practice
from European Cities

Colantonio & Dixon
9781405194198
Urban Regeneration in Europe
Couch, Fraser & Percy
9780632058419
Urban Sprawl in Europe: Landscapes,
Land-Use Change & Policy
Couch, Leontidou & Petschel-Held
9781405139175
Transforming Private Landlords
Crook & Kemp
9781405184151
Real Estate & the New Economy:
The Impact of Information and
Communications Technology
Dixon, McAllister, Marston & Snow
9781405117784
Economics & Land Use Planning
Evans
9781405118613
Economics, Real Estate &
the Supply of Land
Evans
9781405118620
Management of Privatised Housing:
International Policies & Practice
Gruis, Tsenkova & Nieboer
9781405181884
Development & Developers: Perspectives
on Property

Guy & Henneberry
9780632058426
The Right to Buy: Analysis & Evaluation
of a Housing Policy
Jones & Murie
9781405131971
Housing Markets & Planning Policy
Jones & Watkins
9781405175203
Office Markets & Public Policy
Jones & White
9781405199766
Challenges of the Housing Economy
Jones, White & Dunse
978047062334
Mass Appraisal Methods: An International
Perspective for Property Valuers
Kauko & d’Amato
9781405180979
Economics of the Mortgage Market:
Perspectives on Household Decision Making
Leece
9781405114615
Towers of Capital: Office Markets &
International Financial Services
Lizieri
9781405156721
Making Housing More Affordable: The Role
of Intermediate Tenures
Monk & Whitehead

9781405147149
Global Trends in Real Estate Finance
Newell & Sieracki
9781405151283
Housing Economics & Public Policy
O’Sullivan & Gibb
9780632064618
International Real Estate: An Institutional
Approach
Seabrooke, Kent & How
9781405103084
Urban Design in the Real Estate
Development Process
Tiesdell & Adams
9781405192194
Real Estate Finance in the New Economic
World: Development of Deregulation and
Internationalisation
Tiwari & White
9781405158718
British Housebuilders: History & Analysis
Wellings
9781405149181
Books in the series
Jones_ffirs.indd viiJones_ffirs.indd vii 2/7/2012 10:25:26 AM2/7/2012 10:25:26 AM
Contents
Contributors xiii
Glossary xvii
1 Introduction: The Housing Economy and the Credit Crunch 1
Colin Jones

The Irish example 2
International historical housing market context 3
Dynamics of the housing market 6
Housing market and the economy 9
Origins and impact of credit crunch 11
Objectives and structure of the book 18
Summary 23
2 US Housing Policy in the Era of Boom and Bust 25
Harry W Richardson, Gordon F Mulligan
and John L Carruthers
House prices from 1995 to present 27
Housing reforms for the future 35
Conclusion 44
3 Housing Bubbles and Foreclosures that Follow:
The Case of Las Vegas 47
Craig A Depken II, Harris Hollans and Steve Swidler
Data and de nition of property  ipping 48
Anatomy of boom bust market dynamics 50
Foreclosure activity after the bubble burst 51
Concluding thoughts 55
4 Unemployment Risk, Homeownership and Housing Wealth:
Lessons from Bubble Aftermath in Japan 58
Yoko Moriizumi and Michio Naoi
Housing bubble and burst in Japan 60
Unemployment risk and homeownership 68
Housing wealth and consumption 74
Conclusion 81
Appendices: Details of statistical analysis 83
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x Contents

5 The Changing Nature of Household Demand
and Housing Market Trends in China 90
Edward C Y Yiu and Sherry Y S Xu
Introduction to the housing market 91
Population growth hypothesis 94
Income growth hypothesis 96
Monetary policy hypothesis 100
Conclusions 105
6 Structural Sustainability of Homeownership
in Australia 108
Judith Yates
Australia’s housing system 110
Future projections of homeownership sustainability 119
Conclusions 126
7 Impacts on Wealth and Debt of Changes in the Danish
Financial Framework Over a Housing Cycle 128
Jens Lunde
Dynamics of recent Danish housing market cycles 130
Changing structure of owner occupation 133
Changing mortgage finance and indebtedness 135
Financial stability of owner-occupied households 140
Conclusions 151
8 Market Stability, Housing Finance and Homeownership
in Germany 153
Peter Westerheide
Characteristics of the German housing market 154
German housing price trends: an
international comparison 158
Housing demand and housing investment 160
The contribution of the  nancing system 162

The impact of the  nancial crisis on the German
housing market 164
High down-payment constraints and stability:
contradicting aims? The role of savings behaviour 164
Conclusion and outlook 168
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Contents xi
9 The Responsiveness of New Supply to House Prices:
A Perspective from the Spanish Housing Market 170
Paloma Taltavull de La Paz
Housing supply trends 171
Spanish housing market cycle pre and post the
 nancial crisis 174
Estimation of the supply elasticity of new houses 179
Summary and conclusion 184
Appendix: Details of statistical analysis 186
10 The UK Housing Market Cycle and the Role
of Planning: The Policy Challenge Following
the Financial Crisis 195
Colin Jones
Housing market context 196
Anatomy of the housing market boom and bust 197
Evolution of the planning framework in the UK 205
Recent planning policies 207
The planning policy consequences of the
recession and beyond 212
New planning agenda 213
Conclusions 214
11 Developments in the Role of Social Housing
in Europe 216

Christine M E Whitehead
Looking back: social housing and the welfare
state in Europe 217
Outcomes 226
Future developments 231
Conclusions 233
12 Delivering Affordable Housing in the UK 235
Kenneth Gibb
Historic social housing context in Scotland 238
Background to the current Scottish affordability
challenge 239
Assessing the emerging models 245
Concluding discussion 252
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xii Contents
13 The Private Rented Sector As a Source
of Affordable Housing 255
Michael Ball
The private rented sector within the housing system 256
Potential policy developments 265
Potential attraction of large investors 272
Summary and conclusions 278
14 Conclusions: The Challenges Ahead 282
Colin Jones
The credit crunch 282
Commonalities and challenges 284
The future 290
Concluding remarks 292
References 294
Index 312

Jones_ftoc.indd xiiJones_ftoc.indd xii 2/9/2012 11:33:16 AM2/9/2012 11:33:16 AM
Contributors
Michael Ball is Professor of Urban and Property Economics in the School of
Real Estate and Planning, Henley Business School, University of Reading.
His books include Markets and Institutions in Real Estate and Construction
(2006) and the co-author of the textbook, The Economics of Commercial
Property Markets (1998). He jointly chairs the housing economics group of
the European Network for Housing Research; and led the expert advisory
panel on housing markets and planning for the UK government’s Communities
and Local Government department from 2007–2010. He authors the annual
European Housing Review for the Royal Institution of Chartered Surveyors.
John L Carruthers is the Director of the Urban Sustainability Program at
George Washington University in Washington, DC. He was formerly a Senior
Economist in the US Department of Housing and Urban Development.
Craig A Depken II received his PhD in economics from the University of
Georgia and has held tenured positions at the University of Texas at
Arlington and the University of North Carolina at Charlotte. His research
areas include industrial organisation, sports economics, real estate, and
public choice. He has served on the editorial boards of several journals and
as co-editor of Contemporary Economic Policy.
Neil Dunse is a Reader in Urban Studies in the Institute for Housing, Urban
and Real Estate Research at Heriot-Watt University, Edinburgh. He received
his PhD from the University of Paisley and was formerly a senior lecturer at
the University of Aberdeen. His research interests are in housing and com-
mercial real estate economics focusing on office submarkets, valuation
accuracy, market adjustment processes over time, obsolescence and housing
density and planning policy. Recent articles have appeared in Urban Studies,
Real Estate Economics, Journal of European Real Estate Research and
Journal of Property Research, among others.
Kenneth Gibb is Professor of Housing Economics at the University of

Glasgow. Kenneth is editor-in-chief of Urban Studies and a non-executive
director of Sanctuary Housing Association. His principal areas of research
concern the economic treatment of social housing, the application of
be havioural economics to housing questions, the economics of housing
policy and applied market analysis. He recently co-edited Housing Economics,
a  ve volume reader published by SAGE (with Alex Marsh) and the SAGE
Handbook of Housing (co-edited with David Clapham and William Clark).
Jones_flast.indd xiiiJones_flast.indd xiii 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
xiv Contributors
Harris Hollans received his PhD in Real Estate from the University of
Georgia. He is currently an Associate Professor in the Department of Finance
at Auburn University. Prior to beginning his academic career he held vari-
ous senior level positions in the  eld of commercial real estate valuation
and consulting. His professional credentials include membership in the
Appraisal Institute, with whom he holds the MAI designation. His research
interests include real estate market cycles and the  nancial regulatory
structure and its impact on real property markets.
Colin Jones is Professor of Estate Management in the Institute for Housing,
Urban and Real Estate Research at Heriot-Watt University, Edinburgh.
He has held academic positions formerly at the universities of Glasgow,
Manchester and Paisley. Colin’s research interests span housing, urban and
commercial real estate economics. He has undertaken a range of projects for
the UK and Scottish governments including a review of regulation and redress
in the UK housing market (2009). His books include the Right to Buy (2006),
Housing Markets and Planning Policy (2009) and (co-editor) Dimensions of
the Sustainable City (2010).
Jens Lunde is Associate Professor in the Department of Finance at
Copenhagen Business School and has specialised in the area of housing
economics and  nance. Prior to this he started his carrier at the Danish
Building Research Institute and later in the planning office at the Ministry

of Housing. He has published widely in the different  elds of housing eco-
nomics,  nance and policy. Jens has researched extensively on the taxation
of the private ownership of housing, owner-occupiers’ capital structure and
debt, tenure neutrality, the special Danish private co-operative tenure and
mortgage loans.
Yoko Moriizumi is a Professor at the Department of Economics in Kanagawa
University. Her research interests include housing  nance, portfolio choices
by homeowners, and tenure choice and housing demand. Recently she has
become particularly interested in the international comparison of mortgage
choice.
Gordon F Mulligan is Emeritus Professor in the Department of Geography
and Regional Development at the University of Arizona, Tucson.
Michio Naoi received his PhD from Keio University and is currently
Assistant Professor at the Tokyo University of Marine Science and
Technology. His research interests include tenure choice and housing
demand; house price dynamics; and housing market regulation and insti-
tutions. Recent articles have appeared in Regional Science and Urban
Jones_flast.indd xivJones_flast.indd xiv 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
Contributors xv
Economics, Journal of Real Estate Finance and Economics, and Journal of
Property Research, among others.
Harry W Richardson holds the James Irvine Chair of Urban and Regional
Planning in the School of Policy, Planning and Development at the University
of Southern California, Los Angeles.
Paloma Taltavull de La Paz received her PhD from the University of Alicante.
She is senior lecturer in applied economics and researcher in the International
Economic Institute at the University of Alicante. Her research interests are
housing market and real estate economics, as well as Spanish and European eco-
nomics. Paloma’s latest research is focused on housing supply determinants,
price formation and demand analysis in Spanish housing markets. Another area

of interest is the development of European real estate education initiatives.
Steve Swidler received his Ph.D. from Brown University and is currently the
J. Stanley Mackin Professor of Finance at Auburn University. He is a recent
Fulbright Scholar and former  nancial economist with the Office of the
Comptroller of the Currency in Washington, D.C. His research interests
include economic cycles in the housing market, managing house price risk,
and more generally, empirical studies in derivative markets.
Peter Westerheide studied economics at Witten/Herdecke University and
received his doctoral degree from the University of Muenster. From 1999 to
August 2011 he was researcher/senior researcher at the Centre for European
Economic Research (ZEW) in Mannheim. His main  elds of research
addressed the areas of real estate markets analysis and real estate markets
 nance, private old age pension funding, saving behaviour, as well as corpo-
rate  nancing. Peter was also coordinator of the Leibniz-Network “Real
Estate and Capital Markets” (ReCapNet). Since September 2011 he is chief
economist of BASF SE, the world largest chemical company.
Michael White received his PhD from the University of Aberdeen and is
now Professor of Real Estate Economics at Nottingham Trent University.
His research interests are in housing and commercial real estate economics
focusing on market adjustment processes over time, spatial interactions
across locations, and the separation of long and short run in uences on mar-
ket behaviour. His work has analysed issues relating to housing affordability
for government bodies, investment performance for private institutions,
and policy and market interaction for quasi government institutions.
Christine M E Whitehead is Professor in Housing in the Department of
Economics, London School of Economics and Senior Research Fellow at the
Jones_flast.indd xvJones_flast.indd xv 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
xvi Contributors
Cambridge Centre for Housing and Planning Research, University of
Cambridge. She has conducted extensive research on the housing market,

with special reference to housing  nance and subsidies, social housing
provision and land use planning, as well as on urban, industrial policy and
privatisation issues. Major themes in her recent research have included
analysis of the relationship between planning and housing; housing needs
assessments; the role and  nancing of social housing and privately rented
housing in the UK and Europe.
Sherry Y S Xu is a PhD student at the Department of Real Estate and
Construction, the University of Hong Kong (HKU). Her research interests
include macro analysis of real estate markets and real estate  nance includ-
ing REITs. Sherry’s research focus includes Hong Kong, China, USA and
Australia.
Judith Yates is currently an Honorary Associate in the School of Economics
at the University of Sydney after a long career in academia. Her research has
been in the  elds of housing economics,  nance and policy and, in the past
few years, has focused on various aspects of housing affordability. She has
served on numerous government advisory committees and boards and is
currently a member of the government’s National Housing Supply Council.
She holds a Doctor of Economic Science from the University of Amsterdam
and a Bachelor of Economics (hons) from the Australian National University.
Edward C Y Yiu received his PhD from the University of Hong Kong (HKU)
and is now an Assistant Professor at the Department of Real Estate and
Construction, the University of Hong Kong. His research interests include
macro and micro-analyses of housing markets, real estate economics and
 nance, and urban economics. He has recently carried out a study on the
effects of socio-economic, demographic and mobility changes on housing
price gradient changes between Hong Kong and Macau, funded by the
Research Grants Council of Hong Kong. He is currently extending the study
to China housing markets.
Jones_flast.indd xviJones_flast.indd xvi 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
Glossary

Basel III The Basel international agreements relate to common global
standards of capital adequacy and liquidity rules for banks. These were  rst
introduced in 1988. Basel III signi cantly increases the amount of equity
capital that banks are required to have from 2013.
Case-Shiller Index This is the gold standard of house prices in the USA.
It provides a month-to-month measure of house prices that started in
1987. The S&P/Case-Shiller Home Price Indices are resale measures for
the USA tracking changes in the value of real estate, both nationally and
in 20 metropolitan regions. It is based on actual sales, and widely publi-
cised in Standard & Poors outlets. For further information see: http://
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/
en/us/?indexId=spusa-cashpidff–p-us––
CDO A ‘collateralised debt obligation’ is a marketable investment secu-
rity backed by a pool of bonds, loans (not necessarily mortgages) and other
assets, that can be bought and sold on international capital markets. CDOs
are therefore a general class of securities.
Covered Bonds A covered bond is a speci c form of CDO and enables the
investor to have a ‘dual’ credit claim. Residential mortgage-backed securi-
ties are supported by the particular pool of mortgages. However, the covered
bond holder is backed not just by the pool of (mortgage) assets but also by
the issuer. This means that the bond holder has greater protection. Covered
bonds have been used to a great extent in European countries such as
Denmark, Spain and Germany.
Fannie Mae Fannie Mae is a US government sponsored enterprise originally
set up in 1938. It operates in the ‘secondary mortgage market’ to increase
the funds available for mortgage lenders to issue loans to home buyers.
It buys up and pools mortgages that are insured by the Federal Housing
Administration (see below). It  nances this by issuing mortgage-backed debt
securities in the domestic and international capital markets.
FHA The Federal Housing Administration is a US government agency

created in 1934. It insures loans made by banks and other private lenders for
home building and home buying.
Jones_flast.indd xviiJones_flast.indd xvii 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
xviii Glossary
Freddie Mac Freddie Mac is a US government sponsored enterprise
established in 1970 to provide competition to Fannie Mae and operates in
the same way.
GHLC Government Housing Loan Corporation (of Japan) was established
in 1950 to ensure stable housing  nance to support new house building and
to improve the standard of stock destroyed and devastated by Wold War II.
It was an independent government agency that issued mortgages at low
 xed rates of interest. GHLC had a large market share but from 2002 the
government began phasing out subsidised mortgages. The agency was
replaced by the Japan Housing Finance Agency in 2007 with a different primary
role of securitising mortgages from private banks, although securitisation
had begun under the GHLC.
OECD The Organisation for Economic Cooperation and Development
(OECD) comprises a group of 34 countries that includes all western countries.
It was set up in 1961 to promote policies that improve economic and social
well-being in the world.
Jones_flast.indd xviiiJones_flast.indd xviii 2/14/2012 10:18:00 PM2/14/2012 10:18:00 PM
Challenges of the Housing Economy: An International Perspective, FirstEdition.
Edited by Colin Jones, Michael White and Neil Dunse.
© 2012 John Wiley & Sons, Ltd. Published 2012 by John Wiley & Sons, Ltd.
The world is still trying to adjust to the international banking crisis of 2007
that wrought recession and a dramatic downturn in housing markets across
much of the globe, followed by a  scal crisis in many countries that has yet
to be fully resolved. The consequences for national housing markets have
varied dependent on the speci cs of their housing system, the point in the
economic cycle and the exposure to the banking collapses. This book exam-

ines the different experiences of countries in Europe, Australasia and the USA
and draws out the challenges to housing markets in the short and long term.
The credit crunch and its aftermath has also emphasised the importance
of the housing market to the economy. The relationship between the hous-
ing market and the economy has always stimulated debate but it has recently
risen to greater prominence as special editions of Journal of Housing
Economics (13.4) and the Oxford Review of Economic Policy (24.1) bear wit-
ness. In the latter volume, Muellbauer and Murphy (2008) offer a survey of
the multiple interactions between the housing market and the economy but
they leave many questions unanswered. The events at the end of the last
decade have given this issue even more momentum as Gabriel et al. (2009)
note, writing about the position in the USA, ‘The far-reaching economic and
social consequences of the housing crisis require nothing less than the
wholesale evaluation and redesign of housing policy, regulation, and the
 nance systems.’
1
Introduction: The Housing Economy
and the Credit Crunch
Colin Jones
Jones_c01.indd 1Jones_c01.indd 1 2/8/2012 8:28:53 PM2/8/2012 8:28:53 PM
2 Challenges of the Housing Economy
This introduction begins by illustrating the scale of the impact by
reference to the extreme example of Ireland. It then sets out a statistical
overview of international housing market trends over the past four decades
by examining price cycles to provide a context for the book. These trends
demonstrate that the links between the macroeconomy and the housing
market vary between countries (Meen, 2002a, Demary, 2009). The next
section reviews the fundamental dynamics of the housing market and the
importance of tenure institutional structures and market parameters in
each country. The following section highlights the relationship between the

housing market and the economy. The chapter then outlines the origins and
impact of the recent  nancial crisis on house prices in individual countries.
The contents of the remaining chapters are then described explaining which
aspects of the housing economy and market cycles are highlighted in the
different countries studied.
The Irish example
The Republic of Ireland is an extreme example yet its experience is
instructive as a magni cation what happened in many countries. During a
decade-long economic resurgence from the mid 1990s, recognised by the
term ‘Celtic Tiger’, per capita incomes in Ireland rose dramatically and the
population increased by 17%. With no property tax, income taxes and
interest rates falling, and the liberalisation of mortgage  nance making it
readily available, a housing market boom was generated which saw prices
roughly quadruple to their peak at the end of 2006 (ESRI, 2011). In the
process mortgage debt per capita more than doubled supported by easier
access to international  nance for Irish banks and foreign banks entering
the market (Norris and Winston, 2011).
Following the credit crunch, house prices fell by 38% from the end of
2006 to 2010 (ESRI, 2011). The parallel problems in the commercial property
market, together with the collapse of the housing market, contributed to the
subsequent collapse of the banking system and a bailout by the Irish
government. This in turn led to a  scal crisis, and the Irish government
needed to be sustained by a bailout of €85bn in November 2010 by the other
European governments and the IMF. The internal political fallout from
these events led to a successful vote of no con dence in the government and
a general election that returned the opposition. Further a eld it has
contributed to uncertainties on the international  nancial markets about
the future of the euro currency.
Beyond these headlines the impacts on the Irish housing system were
more subtle. Historically the homeownership level was high in Ireland

re ecting both low house prices and that it was the normal tenure in rural
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Introduction: The Housing Economy and the Credit Crunch 3
areas. The boom priced out low-income households, particularly in urban
areas, who had to look to the private rented sector while there was an
increased concentration of high housing debt among successful young  rst-
time buyers. The downturn has hit this latter group worst with negative
equity but they also tend to be relatively affluent, while older home owners,
who represent a broad range of incomes and largely own outright, have also
suffered capital losses (Norris and Winston, 2011).
The full consequences of the credit crunch for the housing market in
Ireland, as in other countries, have yet to fully work their way out, and
that continues to create uncertainty. The recession in the house market
has focused even more public attention on house prices and their future
prospects. Their prominence re ects the importance of the housing market
to household decision making and to the economy. With owner occupation
the dominant tenure around the world such household pressures will have
been felt in most countries. The inevitable and unanswered questions for
which many are searching is where are these trends taking us and when (and
if) the upturn will arrive.
International historical housing market context
In the UK, where monitoring the housing market has become a national
obsession since the credit crunch, newspapers have periodically and
enthusiastically reported negative forecasts, by prophets of doom, of
dramatic falls in house prices. These conclusions are normally based on a
return to a market price level associated with house-price-to-income ratios
last seen just after the millennium. It is a simple analysis, and a message
that dampens market expectations and plays on fears about the fragility of
the housing market and household wealth bound up in a home. The
theoretical basis of these reports is questionable as they consider only one

linkage of the complex forces that shape the housing market and its
dynamics. It does not draw on the experiences of the many other countries
that have been similarly in uenced by the global downturn, or at least only
those that are consistent with their message. Similar national parochial
analyses are being repeated in other countries.
It is important to remember that homeownership is effectively treated
distinctively in different cultures with implications for how housing
markets work and trends in house prices. For example, in southern European
countries households rarely move from their home, which is often purchased
with the help of the family. Often several generations live together under
the same roof. In contrast, in many Anglo-Saxon countries owner occupiers
have sought to purchase at an early age, and move to adjust their housing
requirements through the family life cycle so there is a much more active
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4 Challenges of the Housing Economy
housing market. It is interesting to note that rising unaffordability,
particularly in the latter stages of the last property boom, led, as the book
chapters show, not only to a rise in the age of  rst home purchase in many
countries but also a move towards a return to several generations living
together. Furthermore, in the UK  rst time purchasers increasingly received
 nancial support from parents to raise the deposit. A national survey by the
Alliance and Leicester (2007) at the time found that parents were paying on
average £21,314 to help their children get on the property ladder,
One of the major motivations for this book is to take an international
perspective on the short-term impact of the  nancial crisis on the housing
market and review the reasons for differences between countries. To gain
some initial understanding on the current housing market it is useful to
begin by taking an overview of long-term trends worldwide by reference to
OECD house price data (it excludes some major economies such as China).
Some care should be taken in the comparison of this data as they are con-

structed in different ways and as a result they can be biased, for example
towards certain segments of the market (Eiglsperger, 2010). This issue is
also discussed for the particular case of Germany in chapter 7. In the analy-
sis below our interest is just to establish a broad overview.
A useful way to compare international housing market experiences is to
focus on the different cycles of countries. Table 1.1 reports on major upturns
and downturns in real prices since 1970 for selected countries. André (2010)
de nes major cycles in the housing market as real house price changes of at
least 15% within some of the largest economies and ignores more modest
upward and downward adjustments. Judged by this table, the UK housing
market is the most volatile followed by Spain, Italy and Denmark. Although
not reported in the table, Finland and Sweden show a similar volatility to
Denmark albeit the cycles are different. Many countries experienced signi -
cant upturns in the housing market at the beginning of the 1970s. In the
case of France the house price boom lasted most of the decade but for Italy,
the UK and Japan the tripling of oil prices in 1973 and the recession
that followed was mirrored in a downturn in house prices that lasted up to
four years.
The beginning of the 1980s saw a divergence of house price trends into
two camps. In much of continental Europe real house prices fell substan-
tially – Germany, France, the Netherlands, Spain and Italy (as well as Ireland,
Sweden and Canada) – for the  rst half of the decade if not longer before
showing dramatic growth in the latter part of the decade (Germany excepted).
In contrast the early 1980s saw the beginning of substantial upturns in real
prices in Finland, Denmark, the UK and the USA. These upswings (with the
exceptions of Norway and Denmark) lasted most of the 1980s.
This almost universal (in terms of OECD countries) house price boom of
the (later) 1980s falls away around the end of the decade, and the beginning
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Introduction: The Housing Economy and the Credit Crunch 5

of the 1990s saw a period of modest negative price adjustment for most
countries. In the case of France, Finland, Italy, Spain, Switzerland and the
UK substantial downturns lasted approximately six years. A new signi cant
upturn emerged for most OECD countries in the middle of the decade, some
earlier (Ireland 1992 and Scandinavian countries 1993) and others later
(Canada 1998, Italy 1998, New Zealand 1998 and Switzerland 2000). For
virtually all these countries the house price continued until a sudden end
with the credit crunch.
These long upward movements in house prices were not only the longest
in recent times but also led to the doubling of real prices in some countries.
Yet despite the longevity of the upswing there was considerable variance in
the scale of the upturn. At one extreme the highest real increases were
Table 1.1 Real house price cycles in selected countries.
Country Upturns
Duration
(quarters)
%
Change Downturns
Duration
(quarters)
%
Change
United States 1982Q4–1989Q4 28 +15.3 1989Q4–1995Q1 21 −5.5
1995Q1–2006Q4 47 +60.5 2006Q4–2010Q4 16* −17.1
Japan 1970Q1–1973Q4 15 +56.9 1973Q4–1977Q3 15 −29.1
1977Q3–1991Q1 54 +80.6 1991Q1–2010Q3 78* −44.2
France 1971Q2–1980Q4 42 +40.6 1980Q4–1984Q4 15 −17.6
1984Q4–1991Q2 23 +33.0 1991Q2–1997Q1 26 −17.6
1997Q1–2007Q4 44 +117.7 2007Q4–2009Q2 6 −9.5
Italy 1971Q1–1974Q4 15 +44.8 1974Q4–1978Q1 14 −9.0

1978Q1–1981Q2 13 +41.9 1981Q2–1986Q4 22 −35.6
1986Q4–1992Q2 22 +58.0 1992Q2–1997Q3 25 −28.3
1997Q3–2007Q4 41 +59.2 2007Q4–2010Q3 11* −9.0
UK 1970Q1–1973Q3 14 +68.8 1973Q3–1977Q3 16 −33.3
1977Q3–1980Q3 12 +27.7 1980Q3–1982Q1 6 −12.1
1982Q1–1989Q3 38 +96.2 1989Q3–1995Q4 25 −29.8
1995Q4–2007Q4 48 +157.8 2007Q4–2009Q2 6 −14.7
Australia 1970Q1–1974Q1 16 +33.9 1974Q1–1978Q4 19 −16.6
1978Q4–1981Q4 12 +15.0 1981Q4–1983Q1 5 −10.8
1983Q1–1989Q2 25 +44.0 1989Q2–1991Q2 8 −6.9
1991Q2–2010Q2 76 +139.5
Denmark 1970Q4–1979Q2 34 +35.7 1979Q2–1982Q3 13 −34.8
1982Q3–1986Q2 15 +57.9 1986Q2–1993Q2 28 −34.1
1993Q2–2007Q1 55 +177.7 2007Q1–2010Q3 14 −20.7
Netherlands 1970Q1–1978Q2 33 +95.0 1978Q2–1985Q3 29 −49.6
1985Q3–2008Q4 89 +217.6 2008Q4–2010Q4 8* −7. 9
Spain 1972Q2–1974Q3 9 +31.1 1974Q3–1976Q2 7 −10.6
1976Q2–1978Q2 8 +27.9 1978Q2–1986Q1 31 −32.3
1986Q1–1991Q4 23 +135.1 1991Q4–1996Q3 19 −18.1
1996Q3–2007Q3 44 +121.5 2007Q3–2010Q4 13* −18.5
* represents downturns which were continuing at end of 2010.
Source: OECD quarterly house prices data.
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6 Challenges of the Housing Economy
Ireland 302%, Norway 199%, Denmark 174% and the UK 173%. On the
other hand, the US and Canadian real rises were only 56% and 72% while in
Switzerland it was only 20% although it was not affected by the latest
downturn. There were also mini-cycles within the long upswing with
periods when prices surged and other periods when prices plateaued.
There are a mass of micro-detail differences between countries of which

the above commentary has only begun to scratch the surface. Nevertheless
the review emphasises the important role and scale of cycles in the housing
market. It also establishes a degree of commonality especially in the past
15years of the cycles, re ecting the signi cance and impact of globalisation.
Yet there is sufficient variation to demonstrate the importance of national
factors. There are countries that stand out in different ways. Australia has
not had a signi cant downturn in real house prices over the whole 40-year
period, while the USA suffered its  rst substantive collapse of prices in
living memory after the credit crunch.
Japan has perhaps the most distinctive pattern of real house prices with
long upswings and downswings. First, house prises rose by 57% in real terms
between 1970 and 1974 in just 15 quarters. Then after a downward
adjustment over the next three years of 31%, rising by 77% through
54 quarters, almost 14 years, from 1977 until 1991. This is followed by
almost two decades of prices declining in total by over half in real terms
over the period to the present day. Germany too suffered a long downward
movement in real house prices from 1994 to 2008 which saw a real fall of
26.5% when most European cities were living through a strong housing
market. The Netherlands in contrast has the reverse experience with real
prices consistently rising over a 23-year period from 1985 to 2008 by 233%.
Dynamics of the housing market
A key in uence on these house price cycles is the business cycle of the
individual country with peaks in the two cycles broadly coinciding (Aherne
et al., 2005, André, 2010). This is not always true as the Netherlands
illustrates. The long expansionary phase of house prices around the world
culminating in the credit crunch also continued through the relatively
shallow macroeconomic downturn in many countries around the
millennium. This period of expansion is also signi cant in proportional
terms with real prices approximately doubling that experienced in previous
upturns in most countries. The exceptions are Finland and Spain in the

1980s when there were particular individual economic circumstances that
contributed to dramatic growth (André, 2010).
A rise in real house prices can normally be partly attributed to a period of
(initially) relatively low interest rates, and be associated with ease of
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Introduction: The Housing Economy and the Credit Crunch 7
mortgage  nance and a growth in real incomes (Adams and Fuss, 2010). The
increasing availability of mortgage  nance often coincides with deregulation
of banking systems and increased competition between banks. Signi cant
deregulation of mortgage  nance began in the early 1980s, and by 1990 most
constraints in the industrialised world had been lifted, supporting a major
stimulus to national housing markets in that decade (Ahearne et al., 2005).
The latest upswing in prices was associated with the introduction of more
 exible mortgage products with more relaxed loan-to-value ratios and longer
terms available (Scanlon and Whitehead, 2004).
Housing market trends can also be attributed to and be shaped by long-
term factors which will vary nationally rather than just these short-term
macroeconomic forces. The availability of mortgage  nance varies across
countries causing variations in response to interest rate changes (Kasparova
and White, 2001). Demographic trends through the age structure of the
population, the rate of household formation and migration can have an
important in uence on demand, as the Irish example illustrates (although
this is also a function of long-term economic prospects). House price trends
over time are in uenced by the supply response which in turn is a function
of the land-use planning constraints and the economics of the house build-
ing industry. Barker (2003, 2004) has highlighted the importance of this
issue in the UK relative to other countries. Jones and Watkins (2009) chroni-
cle how the weak supply response in the noughties contributed to house
price increases in every region of UK. However, in other countries with
weak planning system there is the potential for overbuilding with conse-

quences for the investment attributes of housing.
Different tenure structures in countries may in uence the relationships
between the housing market and the economy. Owner occupation and rent-
ing are substitutes, and the interaction between these sectors can impact on
market changes as the following examples illustrate. House price trends
in uence the relative attractiveness of different tenures. A private rented
sector comprising a high proportion of landlords with high debt gearing is
potentially very susceptible to housing market downturns and likely to
amplify price cycles. Long-term tenants are likely to respond differently to
house price cycles from short-term transient tenants who are saving to get
access to the owner occupied sector. The degree of low-income owner
occupation may be an important factor through its impact on house price
volatility and hence the attractiveness of homeownership as an investment
(Westerheide, 2009).
Tenure systems in different countries are partly a policy variable as the
role of the state is crucial and bound up in the realms of political economy.
They are linked directly to housing policy including any rent controls/
regulation, the scale and allocation of social housing and welfare payments.
Kemeny (2005), for example, distinguishes between the dual rental markets
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8 Challenges of the Housing Economy
of Anglo-Saxon countries and the unitary rental markets of some European
countries dependent directly on government policies and social values
(Hulse et al., 2010). In fact the in uence of housing  nance systems and
subsidies/taxation on national patterns of homeownership and renting is a
complex issue. Wolswijk (2010) gives a summary of the diverse taxing of
housing in the EU including taxes on imputed rent and capital gains, the
deduction of mortgage interest against tax and VAT on new housing.
Table 1.2 illustrates the tenure patterns of selected cities and demonstrates
the scale of variation between countries. With the exception of Germany

the majority tenure is owner occupation but there are differences in the
split between the proportions of social housing and private rented sectors.
Social housing is important in many northern European countries although
its role is in decline through sales to sitting tenants, and these  gures
exaggerate its current position (Jones and Murie, 2006). In many countries
such as the USA social housing has been seen simply as welfare housing
and is therefore on a very limited scale (Harloe, 1995). These countries
havealong-established private rented sector that represents a substantial
pro portion of the stock.
Signi cant changes in the long-term social policy and  nancial parameters
of the housing market can impact on private housing market decisions
abruptly but usually take some time. The turning points in house price
cycles are almost always associated with the fundamentals of the economy,
namely interest rates and real incomes. Downturns in housing markets are
historically linked to the overheating of the macroeconomy and growing
in ation, followed by a tightening of monetary policy and the raising of
interest rates to correct this phenomenon (Aherne et al., 2005).
Table 1.2 Households by tenure in selected countries.
Country Owner occupation Social housing Private rented Other Year
Greece 80 0 20 0 2001
Iceland 78 2 5 16 2003
Portugal 76 7 15 2 1999
Belgium 74 7 16 3 1999
Australia 70 5 20 5 1999
UK 70 20 10 0 2001/02
USA 68 3 30 0 2002
Finland 64 17 15 4 2001
France 56 17 21 6 2002
Sweden 55 21 24 0 1997
Denmark 53 19 18 9 1999

Netherlands 53 35 12 0 1998
Germany 41 6 49 5 2001
Source: Scanlon and Whitehead (2004).
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Introduction: The Housing Economy and the Credit Crunch 9
Housing market and the economy
The relationship between the housing market and the economy is more
complex than this simple focus of the macroeconomy on house prices. Much
interest has centred on the role of the housing market on consumption.
Housing is not just any good as it accounts for a high percentage of income
for many households. The Keynesian ‘absolute income hypothesis’ with its
close link between current expenditure/savings and current income or earn-
ings was challenged in the 1980s. This is illustrated by the experience of the
UK during this period; with savings falling dramatically and consumer
spending rising faster than average earnings it suggested that the Keynesian
view was incomplete. The consensus explanation was in the role of perma-
nent income and wealth: the dramatic rise of house prices in the UK (and in
other countries) signi cantly increasing the wealth of households and reduc-
ing the need to save for, say, retirement. Case and Quigley (2008) examine
this relationship in the USA and suggest that the relationship is not so
straightforward. They  nd that the wealth effect works only when the hous-
ing market is booming but the reverse does not happen when house prices
fall. The reason for the asymmetry may be because unless they are selling
their home people do not perceive that their own house price will fall in the
medium to long term.
An alternative perspective on this relationship between consumption and
the economy sees the growth in consumer spending arising from, or at best
encouraged by, positive prospects for the economy, and this process is under-
pinned by house price rises that permit mortgage equity withdrawal (where
the  nance system permits) as a means of funding such expenditure more

cheaply than unsecured borrowing (Aoki et al., 2001). Similarly when house
prices are rising this is usually associated with greater turnover or housing
transactions which leads to a rise in expenditure on complementary goods
such as furniture and carpets.
A further dimension to this relationship between consumption and the
housing market is outlined by Aoki et al. (2001). They develop a model that
simulates the impact of a reduction in interest rates using the  nancial
accelerator model of Bernanke et al. (1999) and applied to housing, in which
imperfections in credit markets amplify and propagate shocks in the macro-
economy. The mechanics of this dynamic is broadly as follows: a positive
shock in economic activity causes a rise in housing demand, which leads to
a rise in house prices and so an increase in home owners’ net worth and their
ability to borrow. Changes to the (de)regulation of banks over time have
in uenced these mechanisms. Some commentators have argued that the
 nancial liberalisation policies gradually endorsed by most countries since
the 1970s has led to excessive liquidity thereby increasing household debt.
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