Europe’s housing market. Lifting the roof

The best way for the euro zone to boost demand is to deregulate its mortgage markets

A DAY rarely passes without the euro area being urged to push ahead with structural reforms to boost its dismal growth rate. This debate tends to focus on supply-side measures, such as making labour markets more flexible. These changes would be welcome, yet a big part of Europe's problem is weak demand, because households save so much. Awkwardly, labour-market reforms that reduce job protection or social benefits are likely to depress spending in the short term. One way to boost both economic efficiency and spending in the euro area would be to shake up its over-regulated mortgage markets.

Research by the OECD has found that variations in the growth of consumer spending among countries in recent years can be explained largely by differences in mortgage finance. In America, Britain and Australia, the ease of borrowing and the availability of housing-equity withdrawal have played a big role in translating gains in house prices into spending. In the euro area consumer spending is less sensitive to rising house prices. The Economist's global house-price indices show that, with the exception of Germany, house prices have been rising as fast in the euro area as in America, but this has not resulted in extra spending and less saving.

Not only is saving high in the euro area, but interest rates are also a less effective tool in supporting demand in a downturn than in America or Britain. In those countries, interest rates affect the economy largely through the housing market. But the euro area's overly regulated and uncompetitive mortgage market blunts the power of interest rates. Most people have fixed-rate mortgages, but unlike in America where home-owners can refinance their mortgages, this is either forbidden or expensive in most euro-area economies, so home-owners rarely enjoy the benefit of falling interest rates, and capital gains cannot be turned into cash.

Loosen up a little

This newspaper often lectures America for excessive borrowing and too little saving; surely we are not suggesting that Europeans should adopt its profligate ways? Yes, we are, but only in part. Just as debt can be too high, it can also be too low. Borrowing is not always bad: it can improve economic efficiency by allowing people to smooth consumption over their lifetime. The problem in America is that debt has grown too rapidly, and saving is dangerously low. There is ample scope for European households to borrow more and save less without getting into America's current economic mess.

Households' debt amounts to almost 90% of GDP in America, compared with only 50% in the euro area. America's household-saving rate has fallen to only 0.2% of annual income, compared with more than 10% in the euro area. This reflects the euro area's less-developed mortgage systems, which make it harder to borrow. In France and Italy the typical mortgage has been for 70% and 55% respectively of a home's value and has to be repaid over 15 years. In America 90% loans are common for a period of 30 years. In some euro-zone countries, the size of loans is limited by law, in others a lack of competition restricts the range of mortgages. High costs for buying and selling homes (over 15% of the price in France and Belgium) discourage owners from seeing them as a liquid asset, and so also blunt the effect of house-price gains on spending.

Liberalisation to encourage competition and innovation in the mortgage market, along with action to reduce transaction costs, would make monetary policy more effective, as well as help to boost spending, at least initially. And in contrast to unpopular labour-market reforms, voters are unlikely to oppose such measures. But what about the European Central Bank's worry that such reforms could exacerbate housing bubbles and economic instability? Deregulation must be done carefully, with adequate supervision to discourage too much risk-taking by lenders. But the blame for housing bubbles usually lies with excessively loose monetary policy, and monetary policy would remain firmly in the ECB's control. Surely the ECB should prefer to drive a well-engineered Porsche with care, than a clapped-out old banger that responds slowly and uncertainly to the accelerator or the brake. Cars don't cause accidents: drivers do.

Editorial says 'The best way for the euro zone to boost demand is to deregulate its mortgage markets'.

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