Net Migration and the Real Estate Market

by Claus Vistesen

Cross posted from Alpha Sources

I don't know whether you follow my little note scrapbook in the form of Beta.Sources but if you do you will have a noticed that I have begun to compile notes for a paper on housing and real estate markets and demographics. Of course it does not constitute a sensational claim to note that demographics have an impact on the real estate market since over the long term demographics constitute the most fundamental and direct proxy for demand on the market for residental real estate. However, precisely because demographics often is branded as a long term variable it is also often neglected because the long is term is not here yet, is it? Well, I think that we can slowly but surely say that it is and given the pace and lenght by which some countries have moved in the last stage of the demographic transition with fertility levels persistingly and for a prolonged period staying under replacement level we should begin at this point to see some real traces. Having said that, it is also at this point very clear to me, after having read a fair share of articles on the basics of price and demand dynamics in real estate markets, that it is very difficult to distinguish between variables from a statistical point of view. In short; real estate markets exhibit notable heterogenity on a cross-country basis but also within countries themselves and while demographics are undobtedly important so are institutional differences in terms of capital/mortgage markets and cultural specifics/customs.

Now, some of the work I have been doing so and thus data I have been looking at concern the potential impact on the real estate market from net migration which in a macroeconomic context would constitute a positive demand shock for housing and in fact also a positive supply shock from the point of view of the labour market. So far, I have been particularly interested in two countries within the Eurozone which have both experienced important property booms in the last decade or thereabout. The two countries are consequently Spain and Ireland. The main discourse in the broad literature on these two countries is that especially the process, throughout, the 1990s and well into 2000s, of nominal convergence effectively leading to negative real interest rates was what predominantly fuelled the boom in the real estate market. I have a feeling however that there is more to the story than this and especially in the Spanish case this is evident I believe. As such it serves to remember that before Spain had its real estate boom which began in the latter part of the 1990s and really took off from 2000 and onwards was destined to become the oldest society on the planet even surpassing Japan. However, something indeed happended as we shall see in the graph below. Turning to Ireland, the picture is more blurry regarding the importance of net migration and the general demographic environment. Like Spain, Ireland also benefitted hugely from the stimulus of low real interest rates through out the 1990s and in the first part of the 2000s. Perhaps some of you will recall the Ireland being denominated as the Celtig Tiger. As we move along I will have more to say about these two economies and their real estate/housing boom at the end of the 1990s. For now, you should think about a real estate boom as not only a fast appreciation of house prices (and subsequent domestic demand through the wealth effect) but also as a surge in construction as new houses are being built. The two graphs below plot (in real units for both series) net migration and construction of new dwellings/households in Spain and Ireland from 1997 to 2006.

As we can see the correlation is pretty strong. In fact, the correlation coefficient between the time series is almost dubiously strong at 0.89 and 0.92 for Spain and Ireland respectively. However, as we all know correlation does not denote connection/causality but still the remsemblance is interesting. From an economic point of view the correlation is not strange I think since net migration clearly constitutes a de-facto proxy for a demand shock in terms of housing. Another thing which is interesting to ponder is the magnitude of migration especially in Spain. Quite frankly it is extraordinary to see how the country has received a steady inflow of +600.000 people in the last five years, something which without a doubt has a 'facilitated' the extraordinary spurt of domestically driven growth in Spain in the recent 7 years. Turning to Ireland the picture remains largely the same with inward migration being the driver, at least, for a part of the new homes built in the last 10 years. However, if we take a strict demographic perspective it is also clear that Ireland's population structure differs fundamentally from Spain. Quite simply, Ireland is much younger and has not seen its fertility slump to the levels of Spain which suggests that the natural demographic dynamism also has contributed somewhat to the increase in household construction.

This was a first crack at a much larger set of issues and as such some obvious questions are pressing ...

- How do price dynamics square with the perspective above?

- Why have some countries in the Eurozone seen their real estate markets appreciate to a much higher degree than other Eurozone countries given the fact that interest rates after all have been low for all the countries, especially in begininng of the 2000s? Within this question also lies the fundamental question as posed recently by Edward in his notes on macroeconomic adjustment in the Eurozone about whether in fact there is an 'age limit' in terms of whether a country can sustain/experience a housing boom?

- What does it mean (relatively to other countries with comparatively lower rates of real estate appreciation) that Spain and Ireland have a fairly high rate of home ownership? I mean, I am sure this is an important aspect, but how important compared to other aspects?

That Perky German Consumer

by Claus Vistesen

Cross posted from Alpha Sources

In my recent notes on the outlook for the Eurozone economy I have emphasised that especially readings/indicators on domestic demand would be important for the ECB in terms of the justification to raise rates. As such, there is plenty of evidence to suggest that invesment and capex, particularly in Germany, might be slowly but surely heading down going further into 2007. Regarding indicators on domestic demand in Germany there is one out today in the form of GFK's consumer survey for July (i.e. a forecast) which is based on the questioning of 2000 people. Bloomberg, as always, have the headlines ...

German consumer confidence rose to a six-month high, led by an increased willingness among consumers to boost their spending.

GfK AG's confidence index for July, based on a survey of about 2,000 people, rose to 8.4 from 7.4 in June, the Nuremberg- based market-research company said today. Economists expected a reading of 7.8, according to the median of 25 forecasts in a Bloomberg News survey.

The improvement suggests consumer spending may increasingly contribute to economic expansion as investor and executive optimism wanes. Growth has so far been driven by exports and company investment. That has pushed the unemployment rate to a six-year low of 9.2 percent.

``The upward trend of the consumer sentiment will continue,'' GfK said in an e-mailed statement. ``A positive development on the labor market and therefore higher incomes mean that the best for domestic demand still lies ahead of us.''

Usually, I would hold here contenting with Bloomberg's summary which is also, I need to add, quite good. However, this time I gone a bit further and managed to dig out the 4 page press release itself from GFK (it wasn't that difficult really) to see whether in fact not the devil was in the detail. The main indicator is of course the sentiment itself and which is forecasted to rise from 7.4 to 8.4 points. Yet, this figure albeit the fact that it is set to show an increase is probably not to much use to any of us. More importantly I think is the propensity to consume as well as the income expectations amongst German consumers. Regarding the former the report notes a level at an all time high which of course, as a fundamental indicator, bodes well for domestic demand in Germany for the remainder of 2007. Yet, turning to the latter income expectations seems to have come off the very high level in the start of 2007 as it posted a decline in June. Whether this will continue is of course debatable. Given the general lucrative wage round negotiations in 2007 from the point of the employees income expectations are likely, I think, to remain strong throughout 2007 especially on a y-o-y basis. Should the trend continue to show a decline or perhaps a stagnation it is of course also important to note just how far the propensity to consume can go up whilst income expectations are declining. One thing I would like also to note is the complete and utter lack of economic reason which seems to be surrounding the 2007 VAT hike. Consequently, we get the following from the GFK and sadly this is also one of the bits quoted by Bloomberg ...

It is evident that the propensity to buy is benefiting from the effects of the positive income expectations, making the temporary blip caused by the VAT increase well and truly a thing of the past.

I am sorry but this just not make any sense at all and if only the world was so easy that you could raise taxes whose contractive impact on the economy would go away after one quarter. I will file this under on of those 'need to write about' for now but really; anyone with just the faintest idea of economics should be weary of accepting such claims. With this small niggle out of the way it is of course difficult not to be in a good mood on the back of this reading. Clearly, it is subject to notable cyclical fluctuations and can not be used to gauge long term trends (which BTW is why the remarks on the VAT are just, well; stupid!). Yet, sentiment remains increasingly on a high level amongst German consumers and contrary to business activity this seems to go on well into Q3 2007 after which the outlook, I believe, is much more uncertain. In terms of the immediate outlook for the Eurozone economy I also think that, if it was ever uncertain, an ECB hike to 4.25% is locked in at this point, unless the heavens somehow come crashing down on global markets or anything else of a cataclysmic event.

However and as customs prescribe it, I have saved the punchline for the end. As such, in this environment where everything seems to be right regarding the German consumer how much will private consumption grow? What in this environment of self-sustaining recovery is a good reading? Well, I will tell you; 1%!

The positive development of the job market and resultant improvement in earnings are mainly responsible for the fact that where domestic demand is concerned, the best is yet to come. All this supports the upward revision of the forecast for 2007 published by GfK last month, which predicts 1% growth in private consumption.

This I think is the big hidden secret about all this talk of a self-sustaining (i.e. domestic demand driven) recovery in Germany. In this way and although the news today is clearly and definitely on the positive side the long term picture remains the same. Quite frankly, and bearing in mind that the forecast presumably includes a Q1 drag on the back of the VAT hike 1% in a good year where growth, income, and confidence conditions seems to be both benigh and accomodative is just not enough. As such, what is the long term trend growth of personal consumption in Germany given its demographic trajectory? And what happens if global or perhaps European growth dynamics change even slightly for the worse?

Ok, this was a long rant and remember also that this is by and large a good reading which is also emphasised by the latest upward adjustment by the IFO institute of German GDP growth for 2007. Also it is worth noticing that the German government is seeing tax receipts grow at a healthy clip which is prompting the government to issue less debt in Q3 2007 something which is indeed good news given the long term trajectory of German public debt. In this light it is also debatable whether this can continue or put in other words; how far will this cycle continue?

The Eurozone - Mixed Data Point to a Blurry Outlook

by Claus Vistesen

Cross posted from Alpha Sources

I have already covered this to some detail here on AS in relation with my notes surrounding the ECB decision to raise to 4%. For those of you who are ardent Eurozone watchers I have a note up over at GEM on the very recent slew of data from the Eurozone. Here is my summary ...

The only thing missing here is of course an interest call on the future course of the ECB in 2007. In many ways, I have already dealt with this in my previous notes on the ECB decision to take the refi rate to 4% a few weeks back. For all intent and purposes it is very difficult, at this point, not to expect the ECB to take it to 4.25% at some point in 2007. Both the recent remarks from the ECB, the Euribor futures markets as well as forecasts from Morgan Stanley indicate this. I remain skeptical on this and I clearly do not agree with Morgan Stanley when they open the door to a refi rate as high as 4.75%; this I think is highly unlikely. What I think is important is that the ECB from here on quite simply have to become more data dependant as it clear that restrictive territory is moving ever close if the threshold has not been passed already, at least in Italy's case. In that respect, the data fielded above paints a less favorable picture than the ECB had expected or at least, this would be my guess. Also, at some point it will be interesting to see whether the ECB can keep on maintaining its cyclops eye fixed on aggregate inflation and monetary measures. As for my official interest rate call I have nudged it up to 4.25% based more on what I think will happen than I think should happen. One thing I think however to be crucial is the incoming real data on domestic demand in Germany and Italy.

Update on Friday, June 22, 2007 at 04:03PM by CV

Today adds a couple of new interesting data points which conform with the headline of a mixed outlook for the Eurozone. Firstly, it seems as of business confidence in Germany may have finally topped although we need to remember that sentiment on a relative basis is still on an all time high.

German business confidence fell more than economists forecast in June after a rebound in oil prices and higher borrowing costs raised concern growth in Europe's largest economy may have peaked.

The Ifo institute's sentiment index, based on responses from 7,000 executives, fell to 107 from 108.6 in May, the Munich-based research institute said today. Economists predicted a decline to 108.4, the median of 43 forecasts in a Bloomberg survey showed.

More evidence of a relative easing of momentum in the Eurozone comes from industrial orders which fell in April. I do think we need however to be cautious here since the number after all is from April and with the latest news from the US about how Q2 growth might even pick up we should perhaps expect a reverse in this in the months to come?

European industrial orders fell in April as the higher euro damped exports of the region's textiles and machinery.

Orders in the euro area fell 0.4 percent from the previous month, the European Union statistics office in Luxembourg said today. Economists had forecast a decline of 0.8 percent, according to the median of 15 estimates in a Bloomberg News survey. From a year earlier, orders increased 12.2 percent, compared with an 8.1 percent rise in March.

And finally some good news albeit the fact that it is not really in the bank yet. Still, the French statisitical office revised its growth forecast upwards today for the last two quarters of 2007 (to 0.7%). All in all, if the INSEE predictions for the Q2-Q4 07 come through France will be looking at an annualised growth rate of 2.5% which is not bad at all.

French economic growth will accelerate in the second half of the year as consumer spending picks up, according to Insee, the national statistics office.

Paris-based Insee predicted Europe's third-largest economy will grow 0.7 percent in each of the next two quarters from the previous three-month period after 0.6 percent in the current quarter and 0.5 percent in the first three months of the year.