If It’s Stability You Want, Then Rent, Don’t Buy
Anyone who got caught in the real estate bust last decade in the U.S. or U.K. probably knows this already, but now the economic data is in: home ownership can be bad for you.
More accurately, it can be harmful to the financial stability of whole economies. That’s the evidence from a new study published this week by European Central Bank research economist Gerhard Ruenstler.
The higher the level of ownership in a given country, the longer and bigger the credit cycles are. And this can make a big difference — look at the chart for Britain, where house prices are the subject of every Londoner’s Sunday brunch chatter. With a rate of 72 percent, higher even than the U.S., the last four decades have seen three matching mega-cycles in credit volumes and house prices.
Now look at the chart for Germany, where people have been traditionally more likely to spend their cash on large motor cars than on mansions. The credit and house price cycles track overall output very closely. Few booms, few busts.
Mapping financial cycles on to measures of output is somewhat in vogue among central bankers and academic economists at the moment, as researchers try to learn lessons from the last financial crisis. A whole new field of endeavor, known as macroprudential policy has grown up, meaning rate-setters are now more likely to try to stem property booms by others means — like loan-to-value limits — than just jacking up the cost of borrowing.
As Ruenstler says, this deserves more thought. Especially as old habits are changing — Germany itself is currently in the midst of a property boom.
“The material differences between both types of cycle (and the precision with which financial cycles can be estimated) justify a macroprudential stabilization policy that differs from monetary and fiscal policy,” Ruenstler writes. “Future research addressing these three points would further deepen the understanding of why and how financial cycles differ from business cycles and what the policy implications are.”
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