Housing Markets and Economic Convergence in the European Union

Citation

Meen, G. (1998), "Housing Markets and Economic Convergence in the European Union", Journal of Property Valuation and Investment, Vol. 16 No. 1. https://doi.org/10.1108/jpvi.1998.11216aae.001

Housing Markets and Economic Convergence in the European Union

Housing Markets and Economic Convergence in the European Union

Michael Ball and Maurizio Grilli

Royal Institution of Chartered Surveyors,1997,ISBN 0-85406-831-7,55 pp.

The role of housing markets within the economy has become a widely discussed topic by economists in recent years, predominantly within the context of the UK economy, although this has also been an issue in Scandinavian countries, given the high degree of volatility experienced in the housing markets of those countries. Whereas many mainstream macroeconomists still maintain the belief that housing is of only minor interest to the wider economy, the housing fraternity would argue that differences in the structure of housing markets between Britain and the rest of Europe was a factor contributing to the UK's departure from the ERM in 1992. Furthermore, on this view of the world, the successful operation of a future monetary union requires convergence of the economies of the participating countries, which may be hindered by structural differences in European housing markets. It is against this background that this comparative study by Ball and Grilli is particularly useful.

In this report for RICS, the authors present a great deal of useful descriptive and analytical material on the structure of European housing markets and their interactions with the domestic economies. The report consists of nine chapters. The first two chapters set the scene and lay out the main questions to be addressed and tested. These include, what are the similarities between European housing markets, are some countries more volatile than others, is there evidence of a convergence of cycles across the EU, what are the determinants of housing investment, what are the links between housing and macroeconomies? Chapters 3 and 4 are primarily descriptive, setting out what is known about the main housing market variables for each country in terms of housing investment, house prices, construction, household growth, home-ownership rates and mortgage markets and also describes European housing policy. Chapter 4 also describes the nature of housing cycles in terms of housing investment and, as far as data permit, house prices. Chapter 5 considers the stability of housing markets, discussing the important issue of whether housing volatility simply reflects the underlying volatility of the economy or whether tenure structure plays a contributory role. Chapter 6 addresses the equally important issue of the timing of housing cycles and whether these have converged over time throughout Europe. It is not difficult to imagine the policy co-ordination problems if these are not synchronised. It is in this chapter that the report moves from descriptive material to formal econometric tests, examining the correlation in housing investment cycles. Chapter 7 is an econometric investigation of the determinants of residential investment, whereas chapter 8 examines the comparative responsiveness of housing markets to a range of random shocks, using a VAR framework. Chapter 9 draws together the conclusions of the report.

As the authors recognise, obtaining comparable data across Europe generates considerable problems which are not entirely surmountable. Nevertheless the authors are be applauded for their attempt. Ball and Grilli are attempting to cover an enormous field in a relatively short report and all issues cannot be covered in depth. However although a lot of the descriptive material has been covered in other reports, the report provides a very useful summary document of the main features and differences between European markets. Equally important it summarises the main data deficiencies. However one of the main deficiencies of the existing literature is that there is almost no international comparative quantitative work available. Although many studies of individual countries have been published, comparative work is lacking. Therefore, in my view, the most interesting aspects of the study come from the econometric analysis and the associated diagnostic tests. Sometimes in Britain we feel that the structure of our housing market is entirely different from the rest of Europe, which somehow has a common structure. Ball and Grilli's work dispels this myth. The response of housing markets across Europe displays distinct differences in response to shocks; a better characterisation of markets is in terms of regional sub-groups. Overall, the author's results do not fill me with confidence that European housing markets are exhibiting much sign of convergence. Ball and Grilli have done a valuable service in showing quantitatively the extent of these differences. Inevitably individual econometric results will always be subject to controversy (for example, I was surprised by the insensitivity of housing investment to interest rates) and, no doubt, their work will generate a great deal of further econometric analysis in the future.

Geoff MeenDepartment of Economics, University of Reading