Monday, 4 February 2008

2003 - 2007 : Housing UP , Real Wage Down

Wage growth has been falling from 2003 until 2007 but during the same period housing price has been growing at a double digit rate (for the main growth area).

Affordability was artificially reach by historically low European interest rates. Most of the mortgage in the past 5 or more years have been approved with a variable rate.

Banks have lowered their credit standard to a level not seen since the late 80's.

So what we have been witnessing is a double digit inflation in housing price and at the same time the wage were unable to keep the same pace. I'm not even talking about rising import prices meaning that the last two decade of cheap import has come to an end, eroding further the house purchasing power.
Stagnating or even declining wages and purchasing power, at the same time double digit growth in housing prices, Oil, food and services rising at pace not seen since late 70's have dented seriously consumer confidence.

What has been the solution to solve this economical "equation" in the past ? High Wage growth or second round effect as refered by the ECB. How did the monetary policy handle such event? interest rate increase unless... a recession comes then asset price and wage growth collapse.

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