Delft University Press is an imPrint of ios Press
ISSN 0926-6240; 31
31
The social limits
to growth
Nick Horsewood
Peter Neuteboom (eds.)
Security and insecurity aspects
of home ownership
increase in home ownership across Europe, with most countries experiencing increases in real house prices. The increase in housing wealth has given home owners eco-nomic opportunities not available to renters, for example early retirement and self-employment. Commensurate with developments in the housing market, changes in the labour market and the social security system have made mort-gage repayments more uncertain, increasing the possibility of loan default. This book presents research on the effects of home ownership on economic activity across the EU, by highlighting both the security and insecurity aspects of the tenure. The analysis was carried out on a EU-level as well as on a cross-country basis; thereby focusing on contem-porary developments in Western Europe and in Central and Eastern Europe. The research, on which this book is based, was done as part of the OSIS-project (Origins of Securi-ty and InsecuriSecuri-ty, the interplay of housing systems with jobs, household structures, finance and social security) and funded by the EU under the 6th framework programme.
Editorial Committee
Prof. M. Batty (University College London)
Prof. dr. J.B.S. Conijn (Universiteit van Amsterdam) Prof. J.F. Doling (University of Birmingham) Prof. dr. P. Glasbergen (Utrecht University) Prof. dr. P. Hooimeijer (Utrecht University)
Prof. ir. G.J. Maas (Technische Universiteit Eindhoven) Prof. dr. N.J.M. Nelissen (Radboud University Nijmegen) Prof. dr. P. Nijkamp (Vrije Universiteit)
Prof. dr. H.F.L.K. Ottens (Utrecht University)
Prof. dr. ir. J. van der Schaar (Universiteit van Amsterdam) Prof. I. Turok (Glasgow University)
Security and insecurity aspects
of home ownership
Nick Horsewood
Peter Neuteboom (Eds.)
Publisher IOS Press BV
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Housing and Urban Policy Studies are edited by
OTB Research Institute for Housing, Urban and Mobility Studies Delft University of Technology
Jaffalaan 9, 2628 BX Delft, The Netherlands Phone +31 15 2783005
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E-mail [email protected] http://www.otb.tudelft.nl
This book is based on a study funded by the European Union under the Sixth Framework Programme (OSIS project, Contract no. CIT2-CT-2003-506007). Design: Cyril Strijdonk Ontwerpburo, Gaanderen
DTP: Yvonne Alkemade, Delft
Printed in the Netherlands by: Haveka, Alblasserdam
ISSN 0926-6240; 31 ISBN 1-58603-699-8 NUGI 755
Subject headings: home ownership, housing, Europe. Legal Notice
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© Copyright 2006 by Onderzoeksinstituut OTB
Preface ... 1
1 Security and insecurity aspects of home ownership A cross-country analysis ... 3
Nick Horsewood and Peter Neuteboom 1.1 Introduction ... 3
1.2 The importance of home ownership for individuals and society at large ... 5
1.3 Security and insecurity aspects of home ownership ... 7
1.4 Structure of the book ... 12
2 Housing and finance markets and the institutional context in Europe ...15
Peter Neuteboom 2.1 Introduction ... 15
2.2 Demography: trends and prospects ... 15
2.3 Labour markets and social security ... 17
2.4 Institutional context ... 20
2.5 Housing markets ... 25
2.6 Finance markets ... 28
2.7 A cross-country comparison ... 32
3 Home ownership and economic transition Hungary as a case study ...35
József Hegedüs and Nóra Teller 3.1 Introduction ... 35
3.2 Macroeconomic changes and changes in the welfare regimes ... 36
3.3 The tenure structure of the housing stock in Central and Eastern European countries ... 42
3.4 Housing markets in Hungary and other Central and Eastern European countries ... 48
3.5 Conclusion ... 55
4 The social dimension of home ownership Who is getting in and who is staying out? ...57
Bengt Turner and Zan Yang 4.1 Introduction ... 57
4.2 Tenure choice: theoretical background and literature review ... 57
4.3 Tenure choice: an empirical test using Swedish data ... 60
5 Home ownership and labour market participation of
younger people ...73
John Doling, Nick Horsewood, Antonis Kassanis and Nicholas Vasilakos 5.1 Introduction ... 73
5.2 The life-cycle consumption hypothesis ... 74
5.3 Tenure choice, equity and employment of younger households in Sweden ... 76
5.4 Younger women, home ownership and labour force participation ... 80
5.5 Conclusions ... 89
6 Early retirement and home ownership ...93
Bengt Turner, Robert Kreft and Zan Yang 6.1 Introduction ... 93
6.2 Income sources of pensioners and the labour market of older employees in European countries ... 94
6.3 Pension systems in European countries... 97
6.4 Retirement decisions ... 99
6.5 Macroeconomic model of early retirement behaviour ... 102
6.6 Microeconomic analysis of early retirement behaviour ... 107
6.7 Conclusion ... 112
7 Home ownership, self‑employment and investment ... 115
John Doling, Nick Horsewood, Antonis Kassanis and Nicholas Vasilakos 7.1 Introduction ... 115
7.2 Self-employment, investment and capital market failures ... 116
7.3 Self-employment and home ownership ... 121
7.4 Investment and home ownership ... 130
7.5 Conclusion ... 134
8 Privatisation of the housing stock in Hungary ... 137
József Hegedüs and Nóra Teller 8.1 Introduction ... 137
8.2 Privatisation of the Hungarian housing stock: aims and outcomes ... 138
8.3 Policy and institutional changes ... 140
9 Insecurity aspects of home ownership ... 161
Kees Dol and Peter Neuteboom 9.1 Introduction ... 161
9.2 Repayment risk of European home owners: the influence of economic and institutional factors ... 163
9.3 An analysis of households with mortgage arrears ... 170
9.4 Discussion ... 176
10 The social limits to growth The security and insecurity aspects of home ownership ... 179
Nick Horsewood and Peter Neuteboom 10.1 Introduction ... 179
10.2 Discussion of main findings ... 180
10.3 What are the (social) limits to home ownership? ... 183
10.4 Directions for further research ... 184
References ... 187
Preface
The majority of Europeans nowadays are owner-occupiers. In countries where this is not yet the case, home ownership is promoted either directly or in-directly by the government, through subsidies, deregulation of the financial markets or phasing out support to the rented sector. Home ownership is al-so inseparable from a minimum level of income security: the purchase of a house is by far the biggest financial commitment that most households take on in their lives. The monthly mortgage payments consume a major part of their disposable income. To many households, their home is the largest, if not the only, capital asset that they have. Deregulation of national labour markets and changes to the social security system in recent years – partly due to glo-balisation and partly to far-reaching integration in the European Union – have, however, weakened the links in the traditional triangle of home ownership, labour market and social security. As a result, the current growth in home ownership seems to be creating more risks for individual home owners and for the society at large. At the same time, home ownership offers new pros-pects for households to assess their housing career along with their labour market position and investment opportunities. As such, home ownership plays a pivotal role in the discussion on improving – within the EU – labour market participation rates and, more generally, on increasing labour market flexibility. All with the aim of making the European economy more competi-tive, leading ultimately to more economic growth while maintaining social cohesion within countries.
So, home ownership has both positive as well as negative aspects for indi-viduals and society. It is within this context that the EU funded research into home ownership, security and insecurity, OSIS-project (OSIS is an acronym for ‘Origins of Security and InSecurity: the interplay of housing systems with jobs, household structures, finance and social security’) was undertaken. The aims and objectives of the OSIS project were firstly to analyse the factors that have impacted upon individual households and have consequences for their positions as home ownership. Secondly, such an investigation would establish how households perceive the patterns of security and insecurity, along with the advantage and disadvantage associated with different housing tenures. The research examined how those perceptions have moulded their personal strategies with respect not only to housing tenure, but also to matters such as jobs, family size, education and pensions; and how those positions have pro-vided them with material security and insecurity. The research agenda was a natural extension of a more explorative EU funded project – Home ownership, Social and Economic Problems (HOSE) – and the observation across European countries that there were potential aspects to home ownership that consti-tuted problems with economic and social dimensions (Doling and Ford, 2003).
both a macro and micro point of view. The research focussed on specific is-sues, which will give more insight into the security and insecurity aspects of home ownership across Europe and help to understand the relationship between the structural position of home ownership in different Europe-an countries – particularly the nature of their home ownership markets, in combination with their labour markets, financial markets and social securi-ty systems – and the existence of securisecuri-ty and insecurisecuri-ty to individual home owners. On the other hand, the ambition of this book is more then merely summarizing the main findings of the research. By integrating the research-results – i.e. combining macro and micro studies, security and insecurity as well as country-specific versus cross-country analysis – we were able to put the results into a new, more coherent, framework. Secondly, by linking the re-search-results better to the current policy discussion on the so-called Lisbon agenda, we made the research results more accessible for non-scientific read-ers.
1
Security and insecurity
aspects of home ownership
A cross-country analysis
Nick Horsewood and Peter Neuteboom
1.1 Introduction
The majority of European citizens are currently owner-occupiers. In countries where this is not yet the case, home ownership is being promoted either di-rectly or indidi-rectly by the government, through subsidies or phasing out sup-port to the rented sector (Conijn et al., 2004). The deregulation of the financial markets since the 1980s also had a positive impact on home ownership rates. Home ownership, however, is also inseparable from a minimum level of in-come security, both in terms of level and stability. The purchase of a house is by far the biggest financial commitment that most households take on in their lives; the monthly mortgage payments consume a major part of their disposable income. To many households, their home is the largest, if not the only, capital asset that they possess. Deregulation of the labour market and changes to the social security system in recent years – partly due to globali-sation and partly to far-reaching integration in the European Union – have, however, weakened the links in the traditional triangle between home own-ership, labour markets and social security. As a result, the current growth in home ownership seems to be creating more risks for individual home own-ers as well as for society at large. At the same time, home ownown-ership offown-ers new prospects for households to speed up progress on the property ladder, to enhance their labour market options and increases investment opportunities for them. As such, home ownership plays a pivotal role in the discussion on improving – within the EU – labour market participation rates and, more gen-erally, on influencing labour market flexibility.
Many have argued that housing risk can be considered as complex and multiple, involving many exogenous and endogenous factors, which are un-evenly distributed and constantly subject to change (Lawson, 2005). In that re-spect the assessment of home ownership in both social and economic terms is uncertain; whether the positive aspects of home ownership outweigh the negative, either on an individual level or on a societal level, remains in dis-pute. As such, it is not inevitable clear that promoting home ownership is contributing to the EU-aim of making the European economy more competi-tive, leading ultimately to more economic growth while maintaining social cohesion within countries.
It is within this context that the EU-funded research into home owner-ship and the connected security-insecurity balance, the OSIS-project1, was
undertaken. The aims and objectives of the OSIS project were firstly to an-alyse the factors that have impacted upon individual households and have consequences for their circumstances as home ownership. Secondly, such an investigation would establish how households perceive the patterns of secu-rity and insecusecu-rity, along with the advantages and disadvantages associated with different housing tenures. The research examined how those percep-tions have moulded their personal strategies with respect not only to housing tenure, but also to matters such as jobs, family size, education and pensions; and how those circumstances have provided them with financial security and insecurity.
When it comes to the level and nature of the security and insecurity ex-perienced by home owners, the state of the art is defined in a recent study by Doling and Ford (2003). This investigation, which was based on a research top-ic in the EU 5th Framework Programme2, involved researchers in eight
coun-tries and was inspired by – albeit unsystematic and patchy – evidence from across Europe that the experience of some households in certain home own-ership markets was becoming problematic. The incidence of mortgage repay-ment difficulties, default, and even compulsory sales, combined with falling prices and negative equity, suggested a side to home ownership that involved problems with a social, economic and political dimension. Initial analysis of the incomplete data indicated that the developments in the housing markets could not be seen in isolation from other developments in European coun-tries, notably in labour markets and financial systems, and not least in social security systems.
OSIS is an acronym for: Origins of Security and InSecurity: the interplay of housing systems with jobs,
house-hold structures, finance and social security, see Dol and Neuteboom (2005), Doling et al (2005), Hegedus and Teller (2005a, 2005b), and Kreft et al. (2005).
Within the broad definition of the OSIS-project it is not possible to make a comprehensive study of all aspects of security and insecurity connected with home ownership. The research has to focus on specific topics, which are partly determined by data availability. The range of issues addressed in the analysis will give more insight into the security and insecurity aspects of home ownership across Europe and help to understand the relationship between the structural position of home ownership in different European countries – particularly the nature of their home ownership markets, in com-bination with their labour markets, financial markets and social security sys-tems – and the existence of security/insecurity to individual home owners.
The majority of chapters in the book do not investigate the factors respon-sible for home ownership in each EU nation, although the characteristics of the households are analysed. Instead, the focus of attention is on the oppor-tunities that home ownership presents to households. As the OSIS project comprised a number of independent research reports, the selection of topics has been based on the less obvious connections between home ownership and economic activity. As such, the link between equity withdrawal and con-sumers’ expenditure has been excluded from the analysis, on account of it being heavily researched elsewhere.
In this introductory chapter we will first, briefly, give some insights on the relative importance of home ownership markets across Europe (Section 1.2). Next, we will address in more detail the research questions raised above (Section 1.3). Finally, we will give an overview of the structure of the book (Section 1.4).
1.2 The importance of home ownership
for individuals and society at large
As stated above, there has been a significant increase in home ownership over the last 25 years and in most countries owner occupation is now the big-gest tenure form. In this section evidence on the relative importance of home ownership, both for the individuals and for society are discussed.
In Table 1.1, home ownership rates across Europe are displayed. It is obvi-ous that in Europe, with the exception of Germany, owner occupation is the main tenure in each country, with the average EU home ownership rate of 61%3. In the past decade, in almost all countries across Europe, home
own-ership rates have increased considerable. This spectacular growth has been
Note that in Eastern Europe home ownership rates are mostly within the range 95-100%; while in the US home
facilitated by a number of factors, for example increases in real income, low-er intlow-erest rates, financial dlow-eregulation and considlow-erable capital gains in the housing market. Changing housing policies – or more generally the shrinking public sector – across Europe has also contributed to the rise in home owner-ship rates. The demise of public sector housing has forced household into a straight choice between the private rented sector, with a number of tenure related problems, and owner occupation.
Commensurate with the growth of home ownership is the expansion of the mortgage market in each country, with the stock of outstanding loans tri-pling in the 1990s. Nowadays, the amount of outstanding residential mortgag-es exceeds more than €4.3 trillion (EMF, 2004); that is more than one third of the combined EU-15 gross domestic product, or 40% of all outstanding bank credit. Although differences in level and pace are noticeable (compare Italy with Denmark and the Netherlands), the general trend and developments are visible in each EU country.
The changing features of the housing market have implications at the household level (see Table 1.2). On the negative side, national budget stud-ies reveal that the monthly mortgage payment is the largest single item of household expenditure, especially in the early years of the loan. When com-bined with housing maintenance costs and housing-related taxation, the cost of home ownership may take more than half of each household’s disposable income. On the positive side, for many households, their home is the largest, if not the only, capital asset that they have. Increases in the price of dwellings, particularly unexpected increases, will enhance the wealth of home owner households, giving them opportunities such as early retirement and self em-ployment, which may not be available to renters.
Here again, the pattern is unevenly spread across Europe, with high-lend-ing countries (e.g. Denmark and the Netherlands) runnhigh-lend-ing in front. Even so,
Table 1.1 The importance of home ownership on a macro level: home
ownership rates and outstanding mortgages in % GDP across Europe
(2002)
Home ownership rate Growth % since 1980 % Outstanding mortgage debt Belgium 68 9 28 Denmark 51 -1 82 France 56 9 19 Germany 45 2 51 Italy 78 17 11 Netherlands 54 12 88 Portugal 75 23 50 Sweden 461 4 48 UK 69 9 62housing equity differs across Europe, where again the Netherlands is top, due to high house price increases in the 1990s; the high housing equity in Bel-gium, France and Italy is more due to low mortgage take-up.
These figures and the brief discussion show that home ownership is im-portant across Europe, both on a macro level as well as on a household level. This issue will be further elaborated on in Chapter 2.
1.3 Security and insecurity aspects
of home ownership
Globalisation, individualisation and increased opportunities
Along with the increase in the proportion of home owners in each EU coun-try there were structural changes in the economic situations facing house-holds, which impacted on the risk or perceived risk that they faced. Firstly, there were reductions in the social security safety net in most countries. When households faced adverse circumstances, the state payments were not as generous and became more difficult to access. This was a partial re-sponse to the recognition that households could use private insurance mar-kets to provide cover for when circumstances changed. However, the failure of the private insurance markets and the lack of information of the marginal home owner meant that households were no longer covered when situations changed. The consequences of such developments meant that the risk associ-ated with home ownership was the responsibility of the household, with the highest risk families being the marginal owner-occupiers.
The concepts of security and insecurity in home ownership are not entirely unambiguous. For instance, house
prices can go up (security) and down (insecurity) So, security and insecurity aspects are more conflated than they appear.
Table 1.2 The importance of home ownership on a household level:
debt-service ratio1 and housing equity across Europe (2002)
Debt-service ratio1 of mortgagees Housing equity2 Belgium 10.3% € 61,766 Denmark 12.8% € 48,209 Finland 20.0% n/a France 18.4% € 80,856 Germany 20.1% n/a Italy 16.2% € 63,135 Netherlands 11.4% € 102,862 UK 15.8% € 46,593
More generally, circumstances have changed dramatically for home owners in recent years. For a long time, home ownership was associated with a se-cure and stable income; in fact this was seen as an indispensable condition for home ownership. In recent years this has been eroded for many (prospective) home owners due to two major trends: globalisation and individualisation.
The term globalisation has been used to describe two trends. Firstly, there are the institutional changes within countries towards market-driven systems, part of what was discussed above. Note that the causal relation is not always clear. Increased international competition can give countries an advantage if they introduce institutional changes – for instance changes aimed at increas-ing labour market flexibility – not in reaction to globalisation trends but as a frontrunner. Secondly, the term can be used to explain the increase in eco-nomic integration of countries through trade, investment, and migration. Over the last two decades international economic integration has been proceeding faster and further than ever before. This has led to a considerable number of changes in labour markets, some of which are consequence of specific gov-ernment policies. Most EU countries have experienced increases in employ-ment on fixed-term contacts and greater pay flexibility; factors that will make repaying a mortgage difficult. The globalisation of financial markets has led to reduced regulation, which has increased the ease of households to obtain mortgages. In most countries these markets have experienced some degree of deregulation and there has been a vast increase in the range of mortgages products available. The liberalisation of financial markets has not necessarily led to a reduction of insecurity facing households, which depends upon the institutional features in each country. High loan-to-income ratios may be dif-ficult to pay back if there are changes in circumstances or increases in inter-est rates. Home ownership is not necessarily the optimal housing tenure for all households as this depends upon their characteristics.
Along side the economic changes impacting on EU countries are the demo-graphic changes, which affect household formation. Firstly, there is individu-alisation, the term used to describe the rise in the single person household. The second demographic feature witnessed in most EU countries is that the population is living longer and this has an impact on the housing market, es-pecially as the elderly are encouraged to remain as independent households in a number of EU states. Thirdly, there is the rise in the dissolution of house-holds through the break-up of relationships. It is strange to consider that the average length of a mortgage is greater than the average length of a mar-riage in certain EU nations. The rise in divorces has lead to an increase in the number of single person households.
sharing institution does not exist for one-person households and unforeseen changes in circumstances have to be dealt with by that individual.
Although these trends are visible in all countries across Europe, in fact across the whole Western world, this does not, by all means, indicate that the impact of these processes on individuals and society are the same eve-rywhere. Even though the mechanisms of security and insecurity work in the same way in different countries, the wide variation in mortgage take-up across Europe suggests that individual households (by their attitudes) and governments (by their policies) exert a strong influence. In recent decades a considerable amount of comparative research has been conducted on the op-eration of the mortgage market in the EU and elsewhere (see Diamond and Lea, 1992; Maclennan et al., 1999). This research shows that the differences between countries are relatively large “due to differences in land law, tax law,
consumer protection, financial structure of the capital market and social-cultural dif-ferences” (Bartlett and Bramley, 1994, p. 8). Recent studies by the ECB (2003),
Mercer Wyman Oliver (2003) and Ball (2004) confirm this conclusion.
Besides increased uncertainty about the sustainability of home ownership, home ownership is now offering households also new opportunities. Since house prices tend to increase in real terms and – in combination with the re-payment of any mortgages – this leaves households with (increased) housing equity (see Table 1.2). In fact, as stated earlier, housing equity is for many the most important capital asset they have (if not the only one). This equity can be utilized in many ways. Firstly, it can be use to speed up the households’ accent on the property ladder. Secondly, one can use the housing equity for other purposes, by using the more widely available housing equity withdraw-al mortgages. Thirdly, housing equity can be used as an withdraw-alternative for savings and pensions, simply by lowering the housing costs or by utilizing reverse mortgages. Individuals have the opportunity to use the equity accumulated in their dwellings, especially when the capital gains are unexpected, to re-tire early. Early voluntary withdrawal from the labour market allows ageing households to enjoy their retirement away from the stress of the transformed workplace. Housing equity can also provide households with ample opportu-nities for investment; either in self-employment or for small business forma-tions. Finally, it can be a tool for intergenerational transfers.
answers differ across time and space, but all encompass a mixture of public (housing provision, regulation) and private initiatives (insurance, sub-prime lending). In fact, recent developments in the more mature financial and hous-ing markets shows that private markets are well adept to ‘serve’ home owner-ship markets in more uncertain times.
Research questions
Numerous research questions arise from the above discussion. At the same time it is not feasible to study all the issues in detail; inevitably, the aims need to be confined to specific topics. Nonetheless, the range of issues addressed in the analysis will deepen our insight into the security and insecurity as-pects of home ownership across Europe and help to clarify the relationship between the structural positions of home ownership in different European countries. Particular attention will be paid to the nature of home ownership markets in combination with labour markets, financial markets and social se-curity systems, and to the sese-curity/insese-curity of individual home owners.
Here, in this book, we restricted ourselves to, what we think, are the three most important issues. Firstly, the issue of labour market participation and home ownership: does home ownership lead to more participation in the la-bour market or to less? Two questions are of interest here: Does home owner-ship increase the participation of young female workers in the labour force? And, do home owners retire earlier than non-home owners? Secondly, as housing equity accounts for the majority of the wealth of owner-occupier households, it is important to determine how housing influences the behav-iour of home owners over their lifetime. Does home ownership help people to become self-employed and eventually start their own businesses? Hence, how does investment in housing relate to other investments? Thirdly, the is-sue of unsustainable home ownership will be addressed. This isis-sue has grown in importance. Unsustainability has become more and more normal in Europe since labour markets were deregulated and demographic transformations be-came more common across the life cycle. But more insight is needed into the causes and consequences of unsustainable home ownership. And what are the features of unsustainable home ownership and how do they relate to the institutional context?
markets and identify similar problems across Europe which could ultimately be ‘solved’ by EU-policy. The research framework is shown schematically in Figure 1.1.
This book will address both the methodology used and discuss the differ-ent results. A more in-depth discussion will be done in the differdiffer-ent chap-ters. Here just some general remarks will be made. To address the different research questions, discussed above, we will draw on various disciplines and methodologies. The analyses will examine the security and insecurity aspects of home ownership using data at both the macro and micro level. One of the advantages of macro time series data, obtained by aggregation across house-holds, is that it removes the idiosyncrasies of households and leaves just the key relationships between home ownership and aspects of security and in-security in the economy. As aggregate statistics often obscure the impact of individual influences, we also use disaggregated approaches to examine the behaviour of households.
International comparative research is always hampered by both data limi-tations and institutional difference across countries, i.e. the relation between institutions/policies and outcomes on the housing market. The first issue is
handled by the extensive use of the European Community Household Panel (ECHP), a longitudinal study that traces the characteristics of households and monitors numerous financial details on incomes and housing costs through time. The ECHP provides information on, amongst others, household type, age, gender, education, occupation, income, socio-economic classification, mortgage expenditure, mobility, and attitudes. The second issue is, of course, one of the key issues of this book. The scope of the book will be Europe-wide, combining countries from Western Europe with countries from former East-ern Europe. Here, Hungary will be taken as a case study. Although this study is about home ownership across Europe, the different chapters will normally use a selected group of countries, which can differ between chapters due to data limitation.
1. Structure of the book
Data used
The aggregate analysis uses data at the national level for EU countries and aims to investigate whether cross-country analysis can shed light on the im-pact of home ownership on economic activity. While the macroeconomic re-search is focused on countries from Western Europe, housing markets in Cen-tral and Eastern Europe are studied, with Hungary as a case study, to see if common problems existed. They will provide evidence of statistical relation-ships between, on the one hand, the security and insecurity aspects of home ownership, and, on the other hand, characteristics of individual countries. The ECHP is the main disaggregated data set used at the micro level, although the analysis is supplemented by national household surveys; the Swedish Household Panel is utilized when considering labour market participation de-cisions and the Hungarian Household Panel provides an insight into factors in Central and Eastern European countries. The disaggregated data focuses attention on the unit of the household and variables in the decision making process may be identified, especially as they may be negligible at the aggre-gate level. By using a data set with variables measured at a consistent basis, comparisons between countries may be undertaken and differences detected. Structure
mortgage markets and the macro economy. The labour market is examined in detail along with institutional arrangements in each country, for example the nature of the social security systems and legal framework. Chapter 3 pro-vides an account of home ownership and economic development in Central and East European Countries, in particular the role of housing in the transi-tion process and how the movement to a market-based system has affected the circumstances of households. Although all transition economies are dis-cussed, Hungary is taken as the case study.
The social dimension of home ownership is analysed in Chapter 4, where an overview is given of home ownership in each of the main European coun-tries. The key research question is who is getting in and who is staying out? The ECHP is used to obtain an insight on the household characteristics of owner-occupiers versus tenants, for example differences in income, house-hold size, age, socio-economic position. Chapter 5 surveys the OSIS findings on the relationship between home ownership and labour market participation rates of the young, using aggregate and disaggregate data. This is followed by an investigation of the contribution by home ownership on early retirement, Chapter 6. As well as providing a picture of different participation rates of the over 55 in various EU countries, there is an investigation of the role played by housing wealth in the accumulation of assets and retirement decisions.
The next two chapters move away from the labour market and look at broader issues. Chapter 7 examines the relationship between home owner-ship and self-employment and between home ownerowner-ship and investment; is-sues that are at the heart of the Lisbon Agenda as they are determinants of growth and productivity in Europe. A description is given of the characteris-tics of the self-employed in Europe and the role of housing equity in provid-ing the capital to overcome capital market imperfections. Empirical analysis takes place at the macroeconomic level. A similar approach is adopted in the second part of the chapter where the interaction of home ownership and in-vestment is examined. Chapter 8 covers the privatisation of the housing stock in Hungary and investigates the circumstances and reasons behind the meth-ods used to privatize the Hungarian housing stock. An assessment is given on the successes for and the failures of the privatisation policy; in particular the necessary institutional changes that were implemented such as those relat-ing to legislation, housrelat-ing finance and subsidies.
on the causes and consequences of unsustainable home ownership.
2
Housing and finance
markets and the
institutional context in
Europe
Peter Neuteboom
2.1 Introduction
This chapter discusses the institutional context of housing and finance markets in Europe. The aim is not to present a comprehensive, in-depth comparison but rather to trace general trends and identify differences between countries. The picture that emerges can also serve as a frame of reference for the results of analyses of (in)security aspects of home ownership – the core theme of this book. We begin by observing various demographic trends, focusing mainly on ageing and individualisation (Section 2.2). We shall then turn our attention to labour markets and social security systems (Section 2.3). The institutional context, with particular emphasis on housing provisions and protection for borrowers, will be addressed in Section 2.4. This will be followed by a discus-sion of housing and finance markets (Sections 2.5 and 2.6 respectively). The final section consists of a cross-country comparison, based on an insecu-rity index compiled from different indicators. Interested readers will find an abundance of more detailed analyses in the literature. See, for instance, ECB (2003); Mercer Wyman Oliver (2003); consecutive studies of the EMF; Donner (2000) and Neuteboom (2002, 2004).
2.2 Demography: trends and prospects
Since the Second World War, demographic patterns in Europe have been dom-inated by two trends: individualisation and ageing, both of which are discern-ible in all European countries, albeit to varying degrees. The trend towards individualisation is reflected in the rise in the number of single-parent and single-person households (also due to some extent to the ageing population). The family as the ‘keystone of society’ is much less in evidence than it used to be. For families – especially mortgage holders – this increases the risks as-sociated with home ownership. Not only are economic factors of importance, but increasingly are also demographic factors, i.e. household dissolution. Em-pirical research (see Chapter 9) has shown that the main contributor to un-sustainable home ownership is household dissolution.
All European countries have experienced a rise in population in recent years. Only Germany and Belgium reported a few years of net decline. The populations of the Netherlands (16%5) and, to a lesser extent, France (11%)
have grown significantly over the past few decades, partly as a result of high levels of immigration.
There has also been a rise in the number of households in all countries (from 20% in Belgium to 38% in the Netherlands), which stems not only from the underlying population growth but also from ever-increasing individu-alisation in society – with the Netherlands again at the forefront. Note that household formation in a country is influenced by both the economic cycle and, more importantly, by the availability of housing. A limited supply of af-fordable housing can be a significant obstacle to new household formation.
The ‘dependency ratio’ (see note to Table 2.1) is lower for the Netherlands (46.8%) than for other countries. The number of elderly people is substantially lower than the European average. In the Netherlands 12.5% of the population is aged 65 and over compared with 16% in Germany and France, over 17% in Sweden and almost 19% in the UK.
The influence of individualisation in household composition is impacting on the risks of home ownership. To begin with, robust growth in the number of single-person households (see Figure 2.1) is increasing the demand for (owner-occupier) housing; this, in turn, co-determines price trends in the owner-occupier market (see Section 2.4). Meanwhile, uncertainty about the stability of the family is adding to the sense of insecurity while it also impli-cates instability of the disposable household income. Household dissolution as a percentage of the total number of families ranges annually from 0.5% in Portugal to 2.9% in the Netherlands. On the whole, household dissolution rates are on the increase and are higher in Northern Europe.
Table 2.1 Total population, the dependency ratio
1and the number of households by
country, 1980 and 2002
Total population (m) Dependency ratio Total households (m)
1980 2002 1980 2002 1980 2002 Belgium 9.8 10.3 53% 52% 3.6 4.3 Finland 4.8 5.2 48% 49% 1.8 2.3 France 53.7 59.6 58% 53% 19.0 24.5 Germany 78.3 82.5 53% 48% 24.8 38.7 Netherlands 14.0 16.1 52% 47% 5.0 6.9 Portugal 9.8 10.3 59% 48% 2.9 3.62 Sweden 8.3 8.9 56% 55% 3.6 4.3 UK 56.3 59.2 56% 53% 19.9 24.12 Source: Eurostat 1 Dependency ratio = number of dependants younger than 15 and older than 65 divided by the total
2.3 Labour markets and social security
As mortgage payments are generally based on expectations of the future in-come of the household, the frequency, nature and consequences of interrup-tions in household income are crucially important. Two factors play a particu-larly important role here: the stability of the household as such (see previous section) and fluctuations in household income as a result of economic chang-es at the macro level (linked to economic growth) and/or the micro level. The workings of the labour market and the social security system are central in this scenario; both are discussed below.
Labour markets
Globalisation and regional economic integration (EU) have radically changed the impact of ‘abroad’ on the, formerly national, labour markets. Internation-al competition in markets for goods and services has put pressure on prices. Reducing labour costs has been beneficial in the competition for interna-tional markets. This induced nainterna-tional governments to transform their labour markets, making labour markets more flexible. Since the early post-war years there has been a shift away from permanent, secure jobs to more atypical or insecure jobs: more self-employment, part-time jobs, fixed-term and casual work and more frequent periods of unemployment (see Table 2.2). In Europe, this process has been accelerated in recent years by the ambition of the EU to
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become more competitive. Note also that the rights of employees with a per-manent contract are diminishing and vary widely between countries. So even those jobs are now less secure than they used to be.
Lastly in this section we present some data on employment (Table 2.2) and unemployment (Figure 2.2). The activity rate – i.e. the number of persons in paid employment (minimum 8 hours per day) divided by the total number of persons aged 15 to 64 – has increased in most countries; certainly female participation rates have grown (see Table 2.3). Once again, in the 1990s it was the Netherlands that showed the highest growth rate, although levels are now about average. The overall picture is of course heavily influenced by the eco-nomic cycle and activity rates tend to grow because there is a trend towards more people working fewer hours a day. So, while overall activity rates have risen, total employment (in hours per year) is, in many countries, still on the decline.
Table 2.3 Activity rate by country
Male Female Total
1992 2002 1992 2002 1992 2002 Belgium 71.9 72.9 49.3 56.9 60.6 64.4 Finland 76.7 76.8 70.2 72.2 73.4 74.5 France 75.3 75.5 59.2 63.5 67.1 69.4 Germany 80.9 79.1 61.0 65.1 71.0 72.1 Netherlands 79.1 84.0 55.7 68.7 67.5 76.5 Portugal 80.3 79.6 60.0 66.5 70.0 72.9 Sweden 83.2 79.2 76.8 75.4 79.9 77.3 UK 85.2 82.3 66.0 68.3 75.7 75.2 Source: Eurostat
Table 2.2 Structure of employment by country, 2002
% Flexible % Part-time % Self-employed Belgium 8.7 21.4 2.6 Finland 16.1 13.5 4.9 France 12.9 16.7 5.5 Germany 12.4 22.3 6.0 Netherlands 14.8 45.5 2.5 Portugal 19.8 11.3 11.9 Sweden 15.5 23.6 1.8 UK 6.0 25.8 5.3
There is some variation in general unemployment rates and long-term un-employment (usually defined as periods of more than 12 months) both be-tween countries and over time. As mentioned before, economic cycles are still quite divergent, in spite of the fact that there is greater economic coopera-tion within Europe. At the beginning of this century, statistics show that the economies of Germany and France have been ailing for more than a decade, while for instance the Netherlands experienced a ‘stand-still’ after years of abundant growth. The UK’s economy on the other hand was still going strong. All these differences are reflected by the data in Figure 2.2. Generally speaking, in Finland, France and Germany there is evidence of persistently high unem-ployment rates, while volatility seems to be higher in the UK.
Social security
Globalisation also has major implications for the social security systems within Europe. A high level of social security has its counterbalance in huge government spending6 and high taxes (making labour costs more expensive).
In times of economic decline – as many countries witnessed in the 1980s – the system comes under severe pressure. Following that crisis, national gov-ernments across Europe set about tackling the resulting high unemployment
Government spending on social security is more than 50% of total government spending in most countries.
rates and high budget deficits, primarily by cutting taxes (labour costs) and stimulating employment figures. The down side to this is of course a growing budget deficit that in turn was dealt with by cutting expenditure; a restruc-turing of the social system was inevitable.
The general trend across Europe, and also on a more global scale, was a decline in state provision, i.e. rolling back of the welfare state. This trend was visible in most countries in Europe. Scandinavian countries, the Netherlands and the UK were frontrunners in this; France and Germany were far slower to proceed.
That said, differences across Europe are still significant; in Table 2.4 the re-placement rates are shown, indicating the income ‘guaranteed’ by the social security system when a householder falls ill, retires or is unemployed (as a percentage of earnings before that event happened).
Besides actual replacement rates, the legal duration of the benefit – the pe-riod that a householder is entitled to an income-related benefit before he/she gradually falls back to a social minimum – is also at stake. These range from six months in the Netherlands and the UK to four years in Denmark for un-employment.
Both figures give insight into the income insecurity households (and home owners!) are facing in the different countries. Note that in all countries both replacement rates and duration have been lowered over the years as a result of the aforementioned restructuring of the social security system.
2. Institutional context
The institutional context in a country consists of all the official and unofficial rules, regulations and subsidies that affect mortgage risks and hence co-de-termine the risk behaviour of owner-occupiers. Home ownership is a compli-cated domain involving legal factors (e.g. consumer protection), social factors
Table 2.4 Replacement rates by cause, by country
Unemployment Illness (State) Pension
1970 2002 1970 2002 1970 2002 Belgium 56.0 62.9 79.3 80.4 68.0 74.0 Finland 54.6 58.8 67.8 75.5 35.5 66.7 France 43.3 70.1 50.9 57.0 48.3 54.7 Germany 62.5 60.0 92.3 100.0 58.8 66.2 Netherlands 84.9 73.4 73.4 84.9 42.9 50.1 Portugal – – – – – – Sweden 80.6 66.6 69.9 79.9 50.9 60.0 UK 51.1 19.0 51.1 22.0 30.6 53.4
(labour market flexibility, social security and financial support), housing pro-visions, and the structure of property and mortgage markets, all of which in-fluence the (net) costs of home ownership and the risk distribution among the different agents (mortgagees, lenders and/or the government). Social fac-tors and housing stock both have a key influence on aggregate demand as they broaden the expenditure opportunities of households and ease uncer-tainty about future income. This, in turn, can lead to greater risk-taking be-haviour, expressed in higher loan-to-value and loan-to-income ratios, as well as a preference for long-term mortgages. Consumer protection and legislation, on the other hand, have a direct impact on the supply side of the market. A strong system of consumer rights shifts the risks of home ownership from the mortgage holder to the mortgage provider: consumer rights limit the like-lihood of mortgage holders falling into arrears, with short-term and low loan-to-value mortgages as a natural reaction by mortgage providers.
This section will concentrate on the systems of housing provision, housing stock, financial support for home owners in arrears and protection for bor-rowers.
Housing provision
In Europe there are a wide variety of schemes designed to guarantee the af-fordability and accessibility of home ownership – sometimes only for specific groups – and to limit the risks attached to it (see Table 2.5). In most countries these arrangements have been overhauled in recent decades. Two trends have emerged: a shift from production subsidies to consumption subsidies and a stronger focus on the market (Ball and Grilli, 1997). The aforementioned fi-nancial and economic crisis that hit many countries in the late 1980s is partly responsible for this turnaround. Essentially, while Southern European coun-tries have continued to operate whole systems of subsidy arrangements, their Northern neighbours have been pushing through fast and radical changes (Donner, 2000). See Doling and Ford (2003) for an up-to-date review of the de-velopments and policy intentions in various European countries.
Next, the ‘subsidy arrangements’ that are of direct importance to mortgage holders will be discussed.
(most of them during the 1990s).
The importance and applicability of other non-fiscal subsidy schemes dif-fer considerably according to country. Usually, there are various co-existent schemes that may be accumulated for some households and be denied to others. In general, eligibility depends on income, age, whether purchase or maintenance is involved, and/or the position of the (potential) buyer on the housing market. These schemes can be split roughly into four categories:
Subsidised loans: loans which are offered at a lower rate of interest than the commercial rate, e.g. the prêt à taux zéro in France.
Interest subsidies: income-dependent interest subsidies (comparable with the housing allowance system in the rental sector).
Savings/lending plans, e.g. the famous Bausparkassen in Germany or the
Compte d’épargne logement in France: householders who make savings
be-fore buying their first property can either obtain a low interest rate mort-gage or a higher (than market) interest rate on their savings.
Guarantees by public or private institutions: the Netherlands is the only country in Europe with a private guarantee institution, the Nationale
Hy-potheek Garantie; public equivalents exist in Denmark, Germany, France and
Sweden, amongst others.
Figure 2.3 shows the average subsidy as a percentage of the gross mortgage payments for the various countries. This percentage is an average of what all the mortgage holders in the respective countries received in 2001. The differ-ences are clear and are not surprising given the above facts and the current debates on the issue. Belgium, the Netherlands and Scandinavian countries all have a favourable tax system for owner-occupiers. The large countries in Europe: France, Germany and the UK, have all abolished their tax systems and householders in those countries no longer benefit – substantially – from any
■ ■ ■
■
Table 2.5 Housing provisions: an overview by country, 2002
Mortgage tax relief Non-fiscal subsidies Guarantees Housing savings contracts Subsidised loans
Belgium Yes, m1 Yes Yes, limited No Yes
Finland Yes, f Yes Yes Yes Yes
France No Yes Yes Yes Yes
Germany No Yes Yes Yes No
Netherlands Yes, m Yes, limited Yes No No
Portugal Yes No No Yes Yes
Sweden Yes, f Yes Yes No No
UK No No No, private
insurance No No
Source: Scanlon and Whitehead (2005), Mercer Wyman and Oliver (2003), Neuteboom (2003) m = marginal, f = flat rate;
form of housing provision. Note that the efficiency of (implicit) subsidies is questionable since it normally leads towards higher house prices and there-fore higher mortgage costs.
Borrower protection
Governments can also exercise a more direct influence: the legal context de-fines – or at least adjusts – the distribution of mortgage risks among borrow-ers, lenders and the government (by legislation, financial support, etc.). Some aspects are addressed in Table 2.6 (see EMF, 2003; Dol and Neuteboom, 2005 for a more exhaustive analysis). One important benchmark in this whole scenario is the European code of conduct: agreements between lenders and the EU regarding minimum information and ground rules for lenders. These agreements have since been integrated into the legislative systems of all EU countries. Some countries, including France, the UK and Sweden, have added a few extra requirements, concerning a duty of care for lenders under which lenders are legally responsible for their lending practices, i.e. householders in potentially risky situations should not be allowed to take out disproportion-ate loans.
There are no uniform procedures in Europe for households in payment dif-ficulties or for repossessions. Contractual penalties for arrears are banned in many countries while repossession times range from fewer than six months in the Netherlands to over five years in Italy. These gaps are directly reflected in the distribution of risk between the borrower and the lender. So it is hardly
surprising that in countries like the UK, where the consequences of arrears and repossessions are fast and severe, the number of householders having payment difficulties is consistently lower than in other countries. The reverse is also true: in countries with a strong tradition of consumer protection (e.g. in Southern Europe) lenders are not prepared – precisely because of this tradi-tion – to grant high mortgages to owner-occupiers (see also Chapter 9).
Table 2.6 gives an overview of different aspects of consumer rights. The scale – ranging from ++ to -/- – indicates whether or not borrower protection is above or below average, the average being based on 15 ‘old’ EU member states.
Financial support
All European governments provide general support for needy households through the social security system. However, the conditions, level and dura-tion of that support vary widely across Europe. What is primarily of concern here is the specific support households can receive when facing problems with their monthly mortgage payment. The governments of most European countries take active steps to prevent home owners who have suffered a drop in income from lapsing into serious arrears (see Table 2.7).
In many countries (including France and the UK) the government promotes self-protection by obliging mortgage holders to take out insurance against long-term illness and incapacity. In France, the Caisse Nationale de Prévoyance is nowadays routinely advised and sold to over one third of all applicants, or, to put it bluntly, anyone without a highly secure job is more or less pushed in-to buying inin-to it. UK housing policy states that home owners are expected in-to insure themselves against a drop in income. The government’s Income Support
Mortgage Interest (ISMI) scheme is obviously based on this principle, as it does
not come into effect until the fortieth week of unemployment (or illness). Un-til then, households either have to carry the burden themselves (using their savings, if available) or through a private insurance policy. In other countries
Introd
Table 2.6 Borrower protection by country, 2003
progress is being made in the privatisation of housing cost support.
Housing allowances – whether public or private – only give households a certain amount of breathing space to look for alternative solutions, as the lev-el and duration of support are limited. As such, households with poor pros-pects of returning to the labour market or generating income in some other way have to move either to the rental sector or to alternative accommodation in the owner-occupied sector.
2.5 Housing markets
Home ownership
After steady growth in the 20th century, the owner-occupier sector now domi-nates the housing market in most EU countries (see Figure 2.4). The Southern European countries, together with Belgium and Ireland, have traditionally had a large owner-occupier sector in which home ownership accounts for approx-imately 80% of properties. The tradition is nowhere near as great in Sweden and the UK, but their respective home ownership rates of 60% and 68% are well above the European average. Denmark, France, the Netherlands and Aus-tria – with rates ranging from 51% to 56% – form a middle group. It should be
Table 2.7 Financial support for home owners facing high housing costs by country, 2003
Which housing costs are covered?
How long after unemployment before assistance is provided? Available only to unemployed Is there a maximum limit before assistance stops? Is there a maximum?
Belgium Monthly
mort-gage payments 6 months
Yes 3 years Yes
Finland Monthly
mortgage costs
Immediately No No Yes, 80%
reasonable housing costs
France Housing costs Immediately No No No
Germany Mortgage costs
based on income/ family size/ housing costs
Immediately No No Yes
Netherlands Monthly
mortgage costs No Yes (1 year) No
Portugal No support – – – –
Sweden Monthly
mort-gage payments
Immediately No No No
UK Interest
payments (ISMI)
> 39 weeks No No Yes
noted now that home ownership rates have increased substantially in some countries in recent years, notably the Netherlands, and that further growth is a key short-term policy objective of the Dutch government. In the other coun-tries, the home ownership sector has stabilised and there are no clear signs of further growth. Germany brings up the rear with a home ownership share of barely 43%7. Increases in the home ownership sector have been on the agenda
of successive governments. Lastly, in Finland home ownership currently ac-counts for 60% of the housing stock. This figure has fallen slightly in recent years, thus making Finland an exception within Europe.
Dwellings
Ownership is usually the only way to obtain a property of high(er) quality, in terms of location, space, etc. It is difficult to compare dwellings in a national context, given the multi-dimensional and not entirely objective nature of the concept of quality. An international comparison is an even more precarious task. In his analysis, Hoekstra (2005) links a value to the different attributes of a dwelling, ranging from type of home, number of rooms and double-glazing to the presence of a garage, etc. After these attributes are scaled and averaged, an index emerges for the average quality of a dwelling in the rental or
owner- Attempts to raise this share have not been very successful; continuous house price decline and the abolishing
of existing subsidy programmes by the government have not helped, either.
occupier sector. This weighted index can also be used for drawing comparisons between countries (see Table 2.8). The findings are relatively consistent: in all countries, quality in the owner-occupier sector is higher than in the rental sector; the quality of the aver-age dwelling diminishes from North to South. Besides financial arguments, the presumed higher quality and vocational aspects are of prime importance in tenure choice.
House prices
One of the most important considerations when thinking about buying a property is the potential financial benefit, both in terms of monthly housing costs (compared to the cost of rental dwelling) and the future invest-ment yield. In many countries, it is more fi-nancially advantageous (in terms of taxes) – especially for people in middle- and high-in-come groups – to buy a property than to rent one. One spin-off for some – the whole point, even – of home ownership is that it presents an opportunity to accumulate capital, even though this capital cannot always be readily consumed (see Table 2.9).
One of the main drivers behind this strat-egy is the trend in house prices. This is a bit of a mixed picture in a European perspec-tive (Boelhouwer et al., 2004; Ball, 2004). In the 1990s, the trend in nominal house prices
ranged from around 150% in Ireland and the Netherlands to a ‘mere’ 7% in Finland (over the period 1990-2002). In some countries, including Belgium, the Netherlands and Ireland, house prices rose continuously in the 1990s. How-ever, in the early 1990s the owner-occupier market in Scandinavia, France and the UK experienced a deep downturn, sometimes by more than -20%. In Ger-many, the ‘crisis’ struck later: property prices stagnated in the mid-1990s and then plummeted (-16%) towards the end of the decade.
In real terms, property prices fell in the 1990s in Germany, Finland, France, Italy and Sweden. The equity gains ‘dreamed’ of by owner-occupiers in these countries never materialised. Only in the Netherlands, Ireland, the UK and, to some extent, Belgium did home owners realise a reasonable return on their investment.
Table 2.8 Housing quality by tenure, by country
Owner-occupied
sector Rental sector Ratio
Belgium 12.06 10.56 1.14 Finland 11.44 9.70 1.18 France 11.93 10.09 1.18 Germany – – – Netherlands 12.94 11.51 1.12 Portugal 10.43 8.61 1.21 Sweden – – – UK 12.34 10.78 1.14 Source: Hoekstra (2005)
Table 2.9 House price developments: long-term,
volatility and recent years (real terms, by country)
Average change real house price 1970-2003 Volatility 1990-2003 Average change real house price 2000-2003 Belgium 1.6% 4.0% 3.2% Finland 1.6% 7.3% 3.0% France 1.4% 3.6% 5.4% Germany 3.1% 8.4% -1.1% Netherlands 2.8% 7.4% 3.2% Portugal -0.9% 3.0% 0.2% Sweden 4.2% 4.8% 4.8% UK 3.4% 8.5% 8.1%
Home owners
The last issue to be discussed in this sec-tion is the characteristics of home owners (this subject will be addressed in more detail in Chapter 4). Table 2.10 shows some of the household characteristics of owner-occupiers. The home owners group consists largely of families (76.7%) in paid employment (57.8%) between the ages of 30 and 65 (69.1%), while there is a growing contingent of single people (17.4%) and pensioners (27%).
Although there are strong similarities be-tween buyers in the different countries in terms of age group, type of household and socio-economic position, there are also some striking exceptions. For example, young people are lavishly represented in the recent buyers group in countries where it is possible to take out 100% mort-gages to finance a property – in this case Denmark, the Netherlands and the UK – as opposed to households that have to finance 20% to 40% of the pur-chase price from their own capital. Not surprisingly, single-person households are also strongly represented in the first group of countries. If we take a closer look at socio-economic position, we find that households with one or more members in paid employment account for over 80% of the entire group, with the exception of Italy where there is a relatively high proportion of self-em-ployed people.
2.6 Finance markets
Outstanding mortgage debt
In the 1990s, the outstanding mortgage debt in Europe more or less trebled. The total outstanding mortgage debt now stands at over €3.9 trillion and is equal to one third of the entire GDP of the EU; mortgages account for over 40% of all bank credit. The growth has been so spectacular that, in many countries, the mortgage debt has even outstripped the national debt. This situation is largely explained by the deregulation of the finance markets, strong economic growth, the increase in home ownership and a steep price rise in real terms.
In terms of mortgage take-up, there is no uniform process despite closer European cooperation: level and growth rate differ considerably from coun-try to councoun-try. In absolute terms, the UK (and Germany) has the largest na-tional mortgage market, but in terms of GDP, the Netherlands and (at a push) Denmark have the largest outstanding mortgage debt (see Figure 2.5). This has not always been the case; these two countries in particular have
experi-Table 2.10 Characteristics of home owners
Owner-occupiers Tenants Age Young (<30 years) 6.8% 23.3% 30-64 years 69.1% 54.1% Elderly (>64 years) 24.1% 22.6% Household type Single 17.4% 38.4% Single-parent 6.0% 9.4% Family 76.7% 52.1% Socio-economic position Employees 57.8% 54.9% Self-employed 8.9% 4.0% Pensioners 27.0% 25.0% On benefit 4.4% 14.2%
enced a sharp rise in outstanding mortgage debt in the past few decades. At the end of the 1980s they were both somewhere in the middle; things (appear to) have moved rapidly since then.
Financial deregulation
A host of rules and regulations governed the mortgage markets in Europe un-til the mid-1980s and early 1990s (Bakker, 1996). A lot has changed since then. Financial deregulation, to some extent ‘forced’ by EU directives, has brought about major changes in the (inter)national mortgage markets. The deregula-tion of the finance system started in the early 1980s in the UK; other coun-tries followed later. The measures included the abolition of interest rate ceil-ings and the relaxation of quantitative credit controls and/or contractual restriction. Barriers preventing (foreign) lenders from entering the mortgage market were lifted. Governments took a back seat; subsidised mortgages were either abolished or increasingly confined to specific groups. In the end, the risk distribution shifted towards the individual. Hence, the insecurity aspects of home ownership are on the increase.
In the 1990s, a wave of mergers occured. The secondary market then came into gear, although the combined secondary market in Europe is still only a fraction of the size of the secondary market in the USA (EMF, 2004).
All these changes triggered spectacular growth in the mortgage market. At the same time, however, it should be realised that the general trend towards liberalisation in Europe has not led to a single integrated European mortgage