Towards the Upturn of Mortgage Markets: Which Policies for the European Context?

1. Towards the Upturn of Mortgage Markets: Which Policies for the European Context? ERES Conference Milan, 24 June 2010 Umberto Filotto – Università di Roma Tor Vergata SDA Bocconi Annalisa Ferrari – Università di Genova SDA Bocconi Federica Ielasi – Università di Parma SDA Bocconi

2. The roleof the mortgage market • From the beginning of the global financial downturn, the observation of residential mortgage market drivers has been focused on their role in triggering the world crisis. • Today, we want to analyze how the residential mortgage market could support the upturn and, consequently, how it could help to solve the present situation.

3. Researchquestions • What is the impact of the global financial crisison European residential mortgage markets? • What differences between European countries come to light from investigating support and restraintfactorsof the developmentofEuropeanresidentialmortgagemarkets?

4. The aimsof the study • This study is part of the wide international debate about the global financial downturn and, as a first step, aims to provide in-depth analysis of residential mortgage market trends in some European countries. • As a second step, the study will investigate the key variables of the residential mortgage supply with the goal of highlighting analogies and differences at cross-border level and pointing out some trends.

5. Data sample • The surveydraws on data on mortgagestocksfromQuarterlyReview - EuropeanMortgageFederation (EMF) • The countriesobserved are Great Britain, Germany, France, Spain, Italy and Poland. • Analysisof the fivemainEuropeanmarketswasaccompaniedby the studyof the Polish market, oneof the mostdynamic in recentyears, asanexampleof the trends in developingmortgagemarkets.

6. Independentvariables • The aimwastoassesswhethermortgage market trends can beexplainedby a modelusingasindependentvariables some of the mainmacro-economicvariables: • GrossDomesticProduct (GDP); • Population; • Unemployment rate; • Inflation rate; • Grossdisposableincome; • Householdspending.

7. Methodology • The methodology applied consists of a non-linear stepwise forward regression model. • First, we analysed the period 1998-2008, and then the period 1998-2007, in order to isolate the effects of the economic crisis in the year 2008.

8. Findings (1998-2008)

9. Findings • First of all, the analysis confirms that there are big differences between countries in terms of the relationships between the macro-economic variables and mortgage stocks. • We can also assess the degree of significance of each independent variable.

10. Significantvariables • We identified for each independent variable, the number of countries where the variable was “very significant” and “significant”; • We also identified the countries where the variable shows a different sign compared to that commonly found in the literature.

11. Significantvariables

12. Significantvariables • Everymacro-economicvariableprovedsignificant or verysignificant in explaining the mortgage market trends in at leasttwocountries. • However, none of the variableswassignificant in more thanfourcountries. So, wefindvaryingdegreesofintensityof the relationshipbetweenvariables and mortagestocksamong the sixcountries. • Finally, threevariables show in at leastonecountry a significantrelationship, butwithanoppositesigncomparedtowhatwouldbepredicted.

13. The effectsof the crisis • Has the financial crisis affected the trends of these relationships? • In order to assess the impact of the global crisis on these relationships the analysis was repeated without the figures of 2008, the first year the crisis hit the financial retail markets.

14. Findings (1998-2007)

15. Anomalousresults • Even in the period 1998-2007 wefoundthat the relationshipsbetween some macro-economicvariables and the mortgage market trendswereanomalous in that the signwasdifferentcomparedtowhatwouldbeexpected: • GDP and population in Germany; • Population in France; • Unemployment rate and disposableincome in Spain. • The reasonforanomalousresultsdoesnothaveanythingto do with the crisis.

16. Verysignificantvariables in explainingmortgagetrends

17. 1998-2007 vs. 1998-2008 • The comparisonof the significantvariables in the twoperiodsshowssmalldifferencesformostcountries. • Thesevariables are confirmedassignificant in bothperiods: • Householdspending in Germany; • Population, unemployment rate and disposableincome in Spain; • Population and householdspending in Italy.

18. 2007 vs. 2008 • We sought confirmation of these results through comparison of the total figures for the six countries: • for the year 2007 and • for the year 2008.

19. Findings (2007 vs. 2008)

20. Significantvariables • The analysisof the total figuresconfirmsthat some macro-economicvariables are verysignificantindependentlyof the historicalperiod (economicstability or beginningof the crisis). • GDP, unemployment rate, disposableincome and householdspendingare confirmedassignificantvariablestoexplainmortgagetrends in both 2007 and 2008, the beginningof the crisis.

21. Conclusion • Legislation needs to take account of the very strong and stable links between macro-economic variables and mortgage markets. • However, as the study has shown, the relationships show different degrees of significance and sometimes even opposite signs in the different countries.

22. Conclusion • So, incentives (or disincentives) for the household credit market, and thus house purchase, require a differentiated approach for each country. • European wide policies are necessary, but they must be based on robust empirical evidence and models adapted to the country of application.