On 20 and 21 October 2008, the Centre for European Economic Research (ZEW) hosted the second joint research conference, which was organised by ZEW and the Deutsche Bundesbank. This year’s conference focused on price development on the residential real estate market and featured discussions on the determinants of real estate market development and their effects on the real economy and on the relationship between real estate prices and bond or stock prices.

In light of the recent real estate market crash, the first speech held by Mathias Hoffmann (University of Zürich) focused on the relationship between mortgage securitisation and the volatility of private consumption. In his speech, Hoffmann explained that private consumption responds less strongly to exogenous shocks in countries with a high share of securitised mortgages than in economies where there is no loan securitisation. This first group of countries is more likely to benefit from the positive effects of international risk diversification, especially during boom periods. In phases of market decline, however, the opposite is true. There is, however, no evidence that countries with higher securitisation levels are more likely than others to be affected by global asset price cycles.

Land as a key factor for the development of house prices

By means of a general equilibrium model, Jiro Yoshida (University of Tokyo) showed that the relationship between house prices and other classes of asset is, among other factors, determined by the availability of land. If the supply of soil is price elastic, real estate prices and the price of other assets may be negatively correlated. On the other hand, positive correlations as well as a generally higher price volatility are the result of a price-inelastic supply of soil.

In his lecture, Alexander Michaelides (London School of Economics) shed light on the role of land in the production of goods and housing supply. He showed that homeowners and property buyers tend to benefit to a greater or lesser extent from falling interest rates and increasing labour productivity. Furthermore, Michaelides also explained that these differences increase with the share of land as an input factor in the aggregate production function.

Kieran McQuinn (Bank of Ireland) presented an empirical cross-country comparison, according to which the development of residential real estate prices can be explained by changes in financing opportunities, which are in turn determined by interest rates and incomes. In his presentation, McQuinn placed particular emphasis on the non-linear effects of interest rate changes.

The papers discussed at the conference are available to download at  www.zew.de/assethousing2008.

Dr. Peter Westerheide, westerheide@zew.de





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