Periodic Reporting for period 4 - SafeHouse (Housing, Finance and the Macroeconomy, 1870-2015)
Période du rapport: 2022-12-01 au 2023-05-31
The main objective of the project is to enhance our understanding of the 20th century transformation of household portfolios and financial sector balance sheets. At the beginning of the 20th century, few people owned their homes. At the beginning of the 21st century, two thirds of Europeans live in their own properties. Residential real estate has become the most important asset in household portfolios, and ownership rates dwarf participation rates in stock markets by a substantial margin across many countries.
Most households have financed the acquisition of real estate with debt. Mortgage debt is now the main financial liability of the household sector, and housing loans are the core asset of the financial sector. With higher leverage and larger balance sheets, fluctuations in the value of residential real estate have become a critical driver of the net worth of households and a key determinant of the health of the balance sheet of financial intermediaries.
The project studies the comparative economic history of housing markets in 13 European economies along with Australia, Canada, Japan and the U.S. from 1870–2015. The research project will generate comprehensive new data as a backbone for future research in the field. It will develop and analyse novel stylised facts about returns on residential real estate as well as for the long-term trajectory of housing wealth and its distribution. Combining the toolkit of quantitative economic history with state-of-the art empirical methods, the project aims to generate new analytical insights into the long-run housing risk and its time variation, the drivers of wealth inequality, and the nexus between housing markets, credit cycles and financial instability.
Most households have financed the acquisition of real estate with debt. Mortgage debt is now the main financial liability of the household sector, and housing loans are the core asset of the financial sector. With higher leverage and larger balance sheets, fluctuations in the value of residential real estate have become a critical driver of the net worth of households and a key determinant of the health of the balance sheet of financial intermediaries.
The project studies the comparative economic history of housing markets in 13 European economies along with Australia, Canada, Japan and the U.S. from 1870–2015. The research project will generate comprehensive new data as a backbone for future research in the field. It will develop and analyse novel stylised facts about returns on residential real estate as well as for the long-term trajectory of housing wealth and its distribution. Combining the toolkit of quantitative economic history with state-of-the art empirical methods, the project aims to generate new analytical insights into the long-run housing risk and its time variation, the drivers of wealth inequality, and the nexus between housing markets, credit cycles and financial instability.
During the reporting period, the focus across the work packages was on data compilation and analysis. We constructed a new annual city-level dataset for 21 global cities in 11 OECD countries over the last 150 years. In many cases we hand collected new data from diverse primary sources such as statistical agencies, tax records, newspapers, real estate agents or other kinds of archival data. For all cities in our sample, we construct price indices, rent indices and total return series. Two working papers are currently being drafted. First results indicate that total returns on real estate were higher outside the large city centers. We explain this surprising result as a compensation for additional risk that investors face in remote locations.
In a second project, we have collected new data on household wealth data and analyzed the role of real estate for household wealth accumulation. The analysis showed that in particular for middle-class households in Europe, capital gains on real estate were the most important factor for wealth growth of middle-class households in Europe. Savings, by contrast, were more important drivers of wealth accumulation in the top-10. The bottom half of the wealth distribution has barely seen any wealth growth since the 1970s.
The first peer-reviewed publication of the project deals with the effects of monetary policy interventions into housing bubbles. The study asks whether central banks can defuse rising stability risks in financial booms by leaning against the wind with higher interest rates. The key result is that discretionary leaning against the wind policies are more likely to trigger crises than prevent them. When financial markets are booming, surprise interest increases by central banks have the potential to make the situation worse.
In a second project, we have collected new data on household wealth data and analyzed the role of real estate for household wealth accumulation. The analysis showed that in particular for middle-class households in Europe, capital gains on real estate were the most important factor for wealth growth of middle-class households in Europe. Savings, by contrast, were more important drivers of wealth accumulation in the top-10. The bottom half of the wealth distribution has barely seen any wealth growth since the 1970s.
The first peer-reviewed publication of the project deals with the effects of monetary policy interventions into housing bubbles. The study asks whether central banks can defuse rising stability risks in financial booms by leaning against the wind with higher interest rates. The key result is that discretionary leaning against the wind policies are more likely to trigger crises than prevent them. When financial markets are booming, surprise interest increases by central banks have the potential to make the situation worse.
The project has advanced our understanding of long-run price trends in housing markets. It provided the important new result that returns on housing investment were not only high in the large cities, but equally high and sometimes even higher in smaller towns. The reason is that investors are compensated for additional risks that exists in more remote locations: markets are less liquid and shocks more frequent. This is an important new insights that challenges the way economists think about the attractiveness of investment locations.
The central importance of capital gains on real estate for middle class households in Europe is another novel result with potentially far-reaching consequences. It means that the financial situation of many households is dependent on price trends in key asset markets and that middle class households in particular have profited from the decline in interest rates and the revaluation of long-lived assets such as houses. Equally, importantly, the project shows that in an age of capital appreciation the bottom half of the population that does not own assets, falls behind with regard to wealth. Measured this way, wealth inequality in Europe has expanded substantially in the last decades.
The insights that "leaning against the wind" policies by central banks have potentially negative effects on financial stability changes the debate about the appropriate policy response to financial bubbles. There does not appear to be a trade-off between growth and financially stability concerns. Surprise interventions by central banks into booming assets markets make the situation worse in both respects.
The central importance of capital gains on real estate for middle class households in Europe is another novel result with potentially far-reaching consequences. It means that the financial situation of many households is dependent on price trends in key asset markets and that middle class households in particular have profited from the decline in interest rates and the revaluation of long-lived assets such as houses. Equally, importantly, the project shows that in an age of capital appreciation the bottom half of the population that does not own assets, falls behind with regard to wealth. Measured this way, wealth inequality in Europe has expanded substantially in the last decades.
The insights that "leaning against the wind" policies by central banks have potentially negative effects on financial stability changes the debate about the appropriate policy response to financial bubbles. There does not appear to be a trade-off between growth and financially stability concerns. Surprise interventions by central banks into booming assets markets make the situation worse in both respects.