Monday, 7 January 2008

ECB : "Unusually High Growth Rates"

Developments in the real estate sector

"Let me conclude with some remarks on residential property prices. As with other asset prices, residential property prices are closely monitored by the ECB in terms of our economic analysis..."

"We do monitor asset prices closely because of the potentially high costs for price stability and for the economy as a whole that are associated with strong appreciations and rapid reversals in asset prices..."

"In terms of recent developments in the euro area real estate sector, the latest available data on house prices appears to support the notion of a cooling in euro area housing market developments after a prolonged period of unusually high growth rates in many euro area countries."

"That said house price growth generally remains relatively elevated in the euro area on average when seen in historical perspective – notwithstanding considerable heterogeneity in underlying country developments."

"The outlook for the euro area as a whole - I insist, for the euro area as a whole - remains that of a relatively soft landing. Within this context, a continued moderation of residential investment would also be likely."

If there is something to highlight is that credit growth to household for housing purchase has exploded and has been growing at a double digit in the past few years. The ECB is aware about that but can't officially target any asset bubble since the consequences are unknown and its impact out of control (since unable to assess the side effects.).

As former US Federal Reserve Chairman Alan Greenspan said, it's better to act after the bubble deflate. This was demonstrated with the Technology bubble of 2000, acting in 2001 by aggressively cutting interest rate and on the way creating another bubble (the US housing bubble as currently witnessing and that is now deflating).

After all nobody knows for sure what is the correct price for an asset and nobody can surely identify a bubble until it deflates...

Source : ECB (last chapter)


Anonymous said...

"After all nobody knows for sure what is the correct price for an asset and nobody can surely identify a bubble until it deflates..."

At least for house prices, in the long term the price is known to be proportional to average salaries. This, as you know, is because most mortgages are paid from salaries. The housing bubble in the UK has been apparent for a few years now on this basis alone, and is finally about to deflate in real terms.


HousingFinland said...

I agree about that but on the other hand if the employment situation stays stable i.e everybody keeps his job then price will stagnate and on the longer term salaries will catchup and affordability will come back to a more natural level.

However the economical situation in the UK is deteriorating and UK has always known boom and bust cycle.
This year, most probably, the UK will see a sharp decline in real price.