Shock news in the Bundesbank’s latest monthly bulletin: German house prices have gone up. The more-or-less flat profile of residential property prices over the past decade has been one of the defining features of Europe’s largest economy over the past year. It meant the country escaped a house price bubble, the downside of which is now being seen in the US, UK and, within the eurozone, in Spain and Portugal. (Instead German investors piled into US subprime mortgages – but that’s another story.)
With the political fate of the $858bn deal to extend Bush-era tax rates beginning to clear – the Senate is expected to advance the legislation in a first procedural vote on Monday - the winners and losers of the proposed legislation are also becoming more apparent.
Victorious in the battle are clearly the wealthiest Americans, who will benefit from current tax treatment of income, as well as capital gains, dividends, and their inheritance, through 2012. There are also some strong provisions designed to boost business investment, which have been cheered by corporate America. And there is some reason for comfort to middle and lower income Americans, who will benefit the extension of a series of individual tax credits that were part of last year’s $787bn stimulus bill. Depending on whether you talk to Republicans or Democrats – each of these provisions could be critical to strengthening the US economic recovery.
But not everyone is happy with the outcome.
Eurozone housing markets are springing back to life. The European Central Bank reported on Tuesday that mortgage lending grew in June at the fastest annual rate for almost two years. Its latest bank lending survey, based on responses from 120 banks, showed second quarter demand for mortgages was the strongest since early 2006.
All of which tells a positive story about the eurozone—at least for eurozone optimists. While attention has focused on the problems of Greece, Spain and Portugal, households elsewhere have spotted that mortgage interest rates are at exceptionally low levels, and have been sufficiently confident about their economic prospects to buy a house.
A less positive interpretation is that consumers are worried about the stability of the euro and see bricks and mortar as a better investment. Gilles Moec, European economist at Deutsche Bank, warns that the ECB might also be less than pleased. He points out the sharp contrast between the revival in mortgage lending and the lifelessness of lending to companies.
If rumour is true, things are looking up for the 100,000 Hungarians more than 90 days past their mortgage due date. What’s left of Hungary’s international loan may end up in a mortgage-relief fund, intended to allow people to rent their homes, reports Reuters.
The new fund – reported in daily Magyar Hirlap and not yet confirmed by officials - would buy property (that would otherwise stand to be repossessed) from commercial banks, allowing mortgage-holders to rent the property. The paper also said that the bad loans of households would be replaced by state loans, though it did not name a source.
A sharp decrease in market functioning is noted by the Bank of England in its latest Financial Stability Report.
US government bonds were the only primary market — out of 15 — described as ‘functioning’ in May; eight were described as impaired. The month before, eight were functioning and two were impaired. Highly recommend a closer inspection of the table to the right – though even at a distance, you get the idea.
Commercial property is the biggest headache globally. Indeed, the housing market as a whole makes an appearance in two of the six key risks noted by the Bank:
- Exposure to european sovereign debt;
- A sustained reversal in investor risk appetite;
- Investors divesting Europe, buying Asia;
- Defaulting borrowers, esp. commercial property;
The US census bureau figures today on new home sales in May are pretty rotten: at a seasonally adjusted, annualised rate of 300,000 they are the worst since the series began in 1963.
Yet the Federal Reserve contented itself with saying that “housing starts remain at a depressed level”. I think it’s likely that they’ll be looking at something like the chart below, and concentrating on the six-month moving average (in pink), rather than the absolute number (the bars).
The Chinese government has raised the deposit requirement to 50 per cent (from 40) on purchases of second homes, in an apparent bid to dampen enthusiasm for property speculation. First-time buyers will also need bigger deposits – a minimum of 30 per cent, up from 20 per cent – where the property covers more than 90 square metres.
Reuters also reports that banks must set mortgage rates on second homes at a minimum of 1.1 times the central bank’s benchmark rate. At the moment, banks can charge rates they deem appropriate.
Ben Bernanke, Federal Reserve chairman, earlier today cited “residential and nonresidential construction” as a headwind to the “moderate” economic recovery. But he also said that consumer spending will be boosted by “a gradual pickup in jobs and earnings, the recovery in household wealth from recent lows, and some improvement in credit availability.”
Household wealth is, of course, comprised of many types of assets, including retirement portfolios and other equity and bond investment holdings. But one of its major components is home values.
So is that portion of household wealth likely to grow? See the somewhat downbeat graph.
We won’t. And we shouldn’t try to.
At least, not according to Atlanta Fed president Dennis P. Lockhart.
European house prices are more sensitive than American house prices to credit supply shocks. But there is a stronger role for housing in the transmission of monetary policy shocks in the US than in Europe.
These are the main findings of an ECB working paper just out that compares housing, consumption and monetary policy in the US and EU.