In this paper from Banque de France, Pamfili Antipa and Remy Lecat argue that home prices in France and Spain ran up to about 20% above their fundamental value by the end of 2008. Only 20%? Ha, I laugh at you France and Spain! America crushes you.
All kidding aside, what's interesting is that the paper concludes that it wasn't loose monetary policy that mostly drove the Spanish and French bubbles; it was loose lending standards that really mattered more so than low interest rates: "When enriching fundamentals with a measure of households’ borrowing capacity, most of this overvaluation, however, disappears as credit duration increased substantially in both countries since the 1990s. This emphasises that the analysis of housing prices should include banking practises much beyond interest rates. This could be extended in particular to credit standards applied to the approval of loans, when long enough time series will be available."
Housing experts here in the US (aka Monday Morning Quarterbacks) have been having this debate here, trying to decide if it was low interest rates, lax lending standards or both which created our craziness, and the subsequent fall. The study concludes the following about France and Spain:
"Hence, monetary policy [in France and Spain] has limited power to control house price dynamics. First, housing prices displays strong inertia which makes an accurate control of their movements through interest rates difficult. Second, housing prices may be sensitive to different segments of the interest rate curve within the euro area (e.g. short-term segment in Spain or long term one in France), leading to highly heterogeneous reactions of European housing markets. Finally, banking practises such as credit duration are important determinants of housing price changes."
Why does this matter? Here's the normative finale of the paper:
"In the debate on the need of monetary policy to control potentially damaging housing booms, this pleads for the use of a wider set of policy tools. A first direction in that sense could structural reforms rendering the supply of housing units flexible enough to curb down lasting house prices appreciation."
I've written before about analyses of the Canadian housing bubble and other countries' bubbles. Here in the US, the debate continues and will probably never be resolved. Should blame rest with the Fed for keeping interest rates too low during the run-up? Or with lenders for being too lax in their lending standards? It's one of the most important questions of our time, and unfortunately we'll probably never have a clear answer.
DT267
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