Yesterday, we took a global view of the Housing boom & bust; Today, we take a somewhat wonkier view of Home construction’s contribution to Employment Growth and GDP in Europe.

As the charts from then Federal Reserve Bank of St. Louis below show, the construction boom was global. It occurred in countries that have home mortgage deductions and those that didn’t; those whose governments have home ownership targets and those that did not.

The one consistent causal element in ALL of these nations was the Community Reinvestment Act, Barney Frank, Fannie & Freddie Ultra low interest rates had made the cost of buying a home much cheaper, and helped set off a boom in prices.

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Source: Economic Synopses Construction and the Great Recession
2011, Number 35

Category: Economy, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Construction Boom in 31 Countries & the Great Recession”

  1. Arequipa01 says:

    “Ultra low interest rates had made the cost of buying a home much cheaper, and helped set off a boom in prices.”

    I think this assertion needs a little nuance. Ultra low interest rates had the effect of pumping upwards asset values as well (in fact that was the intention)- so was that 450k house with a 3200 monthly note really cheaper just because the buyer had access to a teaser rate? It seems more reasonable to say “the apparent cost”.

    We were gamed by a weakness in our interpretation of time and rewards.

    http://www.kellogg.northwestern.edu/faculty/sapienza/htm/Money&Chocolate.pdf

    And maybe: http://faculty.fuqua.duke.edu/~jrb12/bio/Jim/discounting%20time.pdf

  2. AHodge says:

    concept good– charts need another attempt
    no dates
    i would just show Construction share in yearly growth by country since 2000%

  3. RW says:

    What Arequipa01 said …more nuance is needed to really understand the implications of the construction boom.

    Even though mortgages were “globalized” via multi-national warehouse lenders, asset-backed securities and derivatives thereupon, the RE markets themselves remained regional so effects were contingent on local factors.

    For example, the more competitive countries in the Eurozone built up a balance of trade surplus vs less productive members but the currency union and lack of fiscal union allowed essentially uncontrolled capital flows from those countries into the less competitive members. This masked the current account problem for some time.

    A prime example of this was German money flowing into Spain to purchase real estate and build villas. This caused a regional RE boom accompanied by a rise in Spanish worker salaries and allowed Spain to balance its budget for years, even showing a surplus.

    Ireland was similar in a number of ways and also had a balanced budget although its status as a tax haven was probably more consequential; e.g., capital inflows from US corporations were nearly as significant as those from the rest of Northern Europe.

    Easing credit rules to facilitate distribution of that capital through the country probably sounded like a good idea at the time, particularly since it allowed those who distributed that capital (banks and their allies) to make a lot of money themselves.

    NB: those who naively blame government debt for everything never mention evidence such as this of course. Clear evidence contradicting a pet theory is so inconvenient.

  4. gman says:

    I hope all of the repetition can overcome the “backfire effect”!

  5. prsnr24601 says:

    I’ve heard it said that Texas did not have a housing bubble because they had stricter laws about qualifying for loans. If that is true doesn’t it mean that the lenient loans were the real cause of the bubble?

  6. AtlasRocked says:

    I put together a similar graph last year: Try correlating external-debt/citizen with tax revenue/citizen for the G20 nations.
    The highest tax nations are also the highest debtor nations, the exact opposite of what you would expect.
    Conclusion: Raising taxes does not correlate with lowering debt, it correlates with increasing debt.

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    BR: Bush lowered taxes dramatically, increased spending dramatically. How do you spearate one fromt he otehr wnhen running any analysis on this?

  7. AtlasRocked says:

    I just built the graph, Barry. I wasn’t trying to achieve a political statement, I just wanted to see if the countries with the highest revenue actually improved their debt situation. It showed what it showed: High tax revenue/citizen shows a correlation with high debt/citizen.

    And undertaxing does not lower debt either. It works better than overspending, but still does not have any history of repaying the debt created.

    Stop trying to be political and just build the graph for us. :)

    My data is 2 years old, the World bank data from a few years ago showed a much worse external debt in the European countries. Somehow it got much better in the last 2 years, I noticed. How is that possible? I’m afraid they’re cooking the publicized books now, like we do in the US. Hmmmm…..

  8. AtlasRocked says:

    I sent you my graph, it was actually debt/citizen vs debt/GDP.

  9. AtlasRocked says:

    I screwed that last statement up, sorry: The graph I made shows tax revenue/citizen vs debt/gdp…..sorry for my dimentia.

    The trend line is decidedly tilted toward higher debt when the taxes are high, completely contrary to what the tax-mongerers try to sell us: That raising taxes will result in lower debt.

    There is only one way out: Cut spending. Cutting spending is the only gov’t policy that has a history of actually reducing debt.

    - High taxes correlate with high debt in nearly all western democracies. Only Canada has a slightly better record. They may be benefiting from high tax revenue from oil sales, I’m not sure what is there advantage.
    -No history of Keynesian over-spending success exists (paying down the debt created).
    -No history of Keynesian tax cuts repaying the debt created.

    Door #4 is the only one left.

  10. AtlasRocked says:

    I’m a complete dyslexic today, let me try a third time: The graph I made shows Debt/citizen vs total-tax-revenue/GDP.

    The rest of the comments convey what I wanted to say.