Economic and monetary union and its housing consequences
This research aims to investigate possible consequences of the adoption of a single monetary policy for five European housing markets. It brings together comparative housing research and research on optimum currency areas. The research addresses two issues. First, it assesses whether real house price cycles will become synchronised following the convergence in nominal interest rates. Secondly, it explores the implications of stability in nominal interest rates and low inflation in the Euro-zone for the stability of real house prices in the member-countries. The existing members of the European Union are grouped according to characteristics of the transmission mechanism by which changes in interest rates translate into changes in house prices. These elements comprise monetary policy developments (i.e. the level and volatility of interest rates), type (i.e. fixed or variable) of mortgage rates, house price movements (i.e. volatility of house price cycles) and the degree of countries’ involvement in such exchange rate arrangements as the “snake in the tunnel” and ERM. One the basis of these criteria, Germany, the Netherlands, Sweden, the UK and Spain are selected as case studies and time period covers 1972 (when the “snake” was established) up to and including 1999 (the year in which EMU was launched). The approach adopted in the research allows for consideration of the transmission mechanism in the context of structural changes in systems and policies that determine housing demand and supply. Therefore, the thesis investigates macro-level trends drawing on secondary sources, statistics as well as interviews with informed commentators and key actors. The analysis is conducted in the following order: first, for each case study country, the importance of monetary policy for house price changes is examined, and secondly, the possible impact of a single monetary policy on economic convergence and synchronisation of house price cycles across the countries is investigated. The research suggests that the adoption of the single monetary policy per se is unlikely to lead to significant synchronisation of real house price cycles because the relationship between changes in interest rates and changes in real house prices is likely to continue to differ across the countries. The pursuit of a single monetary policy might not ensure economic convergence between the countries either, and in this case differnces in GDP fluctuations would lead to the divergence of real house price cycles. The study also demonstrates that recent developments in the systems and policies that determine housing demand and supply might lead to an increase in house price volatility in all countries bar Germany. It concludes that countries need to manage their housing markets using non-monetary instruments regardless of whether or not they are within EMU. These measures might help reduce the likelihood of asymmetry in economic developments in EMU arising from the importance of changes in the housing markets to economic developments.