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EU housing markets before financial crisis of 2008: The role of institutional factors and structural breaks

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Abstract

We study if and how the structure of EU housing markets, particularly the role of structural breaks and the institutional characteristics of national residential mortgage markets across the EU countries affects the EU housing prices before the financial crisis of 2008. We document three main features: first, the institutional characteristics of residential mortgage markets differ markedly across EU countries; second, and according to a wide range of indicators, the increase of housing prices is significantly stronger in those countries where the credit policy characteristics are less conservative; third, for the majority of EU countries, we find evidence of structural breaks in EU housing markets that often coincide with a housing market policy change.

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Notes

  1. Guiso et al. (1992) report for example, that in Italy possession proceedings by a mortgage lender to obtain the title to the property of a borrower in default can take up to 6 years, for what the banks tend to provide customers with a lower leverage, which translates into reduced LTV (loan to value) ratios.

  2. According to Hendry (1995) a structural break is an unexpected change over time in the parameters of regression models, which can lead to huge forecasting errors and unreliability of the model in general. The author argues that a lack of stability of coefficients frequently causes forecast failure, and therefore we must routinely test for structural stability – i.e., the time-invariance of regression coefficients, a central issue in all applications of linear regression models.

  3. Calza et al. (2013) report that “this heterogeneity is particularly evident within the euro area, where mortgage lending remains a predominantly domestic business activity, largely reflecting natural traditions and cultural factors as well as the institutional settings of the local banking sector.”

  4. Housing transaction costs include registration costs, real estate agents’ commissions, legal fees and sale and transfer taxes.

  5. For a broad review of the range of systems of housing finance used throughout the developed countries, please see Boléat (1985).

  6. Available in www.doingbusiness.org. A complete description of the indexes and their components is available in www.doingbusiness.org/MethodologySurveys/GettingCredit.aspx.

  7. Global Real Estate Investment Attractiveness Index (Global REIA Index).

  8. The variables included in the analysis have suffered a prior standardization. When the variables have different measurement scales and whether apply cluster analysis without a prior standardization, any distance measure will reflect the weight of the variables that have higher values ​​and greater dispersion.

  9. Denmark represents an exception, because despite its high average LTV values, shows a predominance of fixed-rate mortgage, use of historical property valuation and a low weight of securitization.

  10. According to Tobin’s q approach, the profitability of property investment depends on the ratio between house prices and construction costs. When property prices rise above the cost of construction, it is profitable for property developers to construct new buildings.

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Acknowledgements

This paper is financed by Portuguese national funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., project number UIDB/00685/2020 (António Miguel Martins).

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Authors and Affiliations

  1. Centre of Applied Economic Studies of the Atlantic (CEEAplA) and Universidade da Madeira, Funchal, Portugal

    António Miguel Martins

  2. CEF.UP, Universidade Do Porto, Porto, Portugal

    Ana Paula Serra

  3. FEP, Universidade Do Porto, Porto, Portugal

    Francisco Vitorino Martins

  4. Henley Business School, University of Reading, Reading, England, UK

    Simon Stevenson

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  1. António Miguel Martins
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Martins, A.M., Serra, A.P., Martins, F.V. et al. EU housing markets before financial crisis of 2008: The role of institutional factors and structural breaks. J Hous and the Built Environ 36, 867–899 (2021). https://doi.org/10.1007/s10901-021-09848-7

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