In yesterday’s post we argued that housing is an asset, whose value should be determined by the expected future value of rents, rather than a textbook demand and supply for physical dwellings. In this post we develop a simple asset-pricing model, and combine it with data for England and Wales. We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates. Increasing scarcity of housing, evidenced by real rental prices and their expected growth, has played a negligible role at the national level.
A tulip bulb produces flowers. Those flowers are what people actually enjoy consuming, not the bulb. Whilst that’s blindingly obvious for tulips, the equivalent is also true for housing. The physical dwelling is the asset, but it’s the actual living there (aka “housing services”) that people consume. The two things sound very similar and are often lumped together as “housing”. But in today’s post, we argue they are as different as bulbs and flowers. Sketching out a simplified framework of houses as assets we show how this can radically change how one views the “housing market”. Tomorrow, we use this to develop a toy model and bring it to the data to shed light on house price growth in England and Wales.
The risk of Greece exiting the euro area (Grexit) has unsettled financial markets regularly over recent years. A New Year poll suggested that most Greeks feel that 2016 will see the threat of Grexit return. However, even if the probability of Grexit rises again, that does not necessarily mean that financial markets will respond with similar volatility. Indeed, this post shows that, based on the sensitivity of international asset prices to those in Greece itself, each successive episode of Greek stress has in turn caused less stress abroad.
To measure the sensitivity of global financial markets to Grexit risk I regress euro area, UK and US asset prices on a composite of Greek asset prices. I do this for three different episodes when Greek financial markets exhibited signs of stress and there was also a high volume of news articles on Bloomberg that referred to Grexit risk. For most euro area, UK and US asset prices, their sensitivity to Greek stress declined in each successive episode.
When the ECB announced an extension of its asset purchase programme on December 3 2015, the euro appreciated, bond yields rose and equity prices fell. This does not mean that the extension tightened monetary policy, but merely that it was smaller than what markets had priced in. In order to calculate the full impact of the programme on asset prices, we need to measure both the anticipation effect and announcement effect and add the two up. Our analysis suggests that the announcement effect undid about half of the anticipation effect, and so the extension of asset purchases still pushed down yields, supported equity valuations and depreciated the euro. However, compared to the initial programme, its impact on asset prices was smaller. Continue reading “Too eagerly anticipated: The impact of the extension of ECB QE on asset prices”→