International International topics

Economics

February 21, 2003

Frankfurt Voice
Bubble trouble in the housing market?
Housing prices in many industrial countries have jumped in recent years. This has triggered concern that the bursting of the asset bubble in the equity market might be followed by a further bubble in the housing market. Such speculative overheating would have far-reaching repercussions for households and banks alike. If the real estate market were to implode, the result would be a wave of credit defaults and private consumption would suffer even more than when the stock market crashed. Reference is often made to the fateful development in Japan at the end of the 1980s when the property market collapsed on the heels of the equity market and plunged the economy into recession. In the USA, average house prices rose by 8.5% yoy in 2002. Economic growth and historically low interest rates easily explain this price dynamic, though. Only a few sub-markets might be faced with price declines. In the UK, house prices soared by nearly 20% in 2002. The healthy cyclical situation, low inflation rates and, as a result, very low interest rates can largely explain this growth. The rally is likely to end in 2003. Our model signals that the market is slightly overvalued. Either a noticeable slowing of the growth or a short period of (slightly) declining prices can return the trend to the normal path. However, a slump lasting several years, as in the early 1990s, is unlikely. Spain also saw house prices climb at a rapid rate of over 20% yoy in 2002. The increase is largely in line with the fundamentals, though: household income is rising much faster there than in the euro area as a whole. Eurolands low interest rates have a very expansionary effect especially for Spain. Moreover, the single currency area improves conditions for the foreign acquisition of property within the European Union. However, particularly the more moderate GDP growth outlook suggests that prices will not rise nearly as noticeably in the coming years. The discussion about real estate bubbles in the above-mentioned countries is understandable given the burgeoning of house prices there, but there is absolutely no substance for such debate in Germany. In west Germany, house prices have been edging up very slowly; in east Germany, they have been falling for seven years. A subsidy-induced bubble was evident in east Germany for a while, but it has long since burst. Tobias Just, +49 69 910-31876 (tobias.just@db.com)

Editor Hans-Joachim Frank +49 69 910-31879 hans-joachim.frank@db.com Publication Assistant Astrid Petter +49 69 910-31755 astrid.petter@db.com Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter

Frankfurt Voice

February 21, 2003

Economics

February 21, 2003

Frankfurt Voice

Bubble Trouble in the housing market?

Housing prices in many industrial countries have jumped over the past four years in some regions at double-digit rates. Most market observers initially welcomed the trend. One of the leaders in The Economist of March 30, 2002 was entitled The houses that saved the worldThe argument went that the stable development of house . prices cushioned the slump in the equity markets and thus sheltered the US economy from a deeper recession. Meanwhile, though, some analysts, especially in the business press, have had a change of heart. Particularly the trends in the USA and the UK sparked debate last year that an asset bubble might be developing in the housing markets. Towards the end of 2002 the same question was increasingly raised with regard to the countries of continental Europe and even the German market. For this reason, the present report will investigate whether a speculative bubble has indeed developed in the housing markets of the USA, the UK, Spain and Germany. First, we need a clear definition of the word bubble since nowadays the term suffers from overuse. ,
House prices
1985 = 100* Spain UK USA Germany 450 400 350 300 250 200 150 100 50 0 85 87 89 91 93 95 97 99 01 *Spain: 1987 = 100

Definition
It is no trivial matter to distinguish an asset bubble from normal, cyclical growth. Three elements can be isolated in the process:1 1. A bubble is at hand if unusually strong price increases cannot be explained by verifiable fundamental data on record. 2. Property values are based mainly on the markets assessment of future developments. In the first phase of a bubble, expectations as to how the fundamental data will develop deviate increasingly to the positive side of their trend value. 3. In the second phase, the continuing exuberance contrasts increasingly with the fundamental data, as new information actually calls for a lowering of the expectations. The bubble implodes. The constituent features 2 and 3 make it virtually impossible to recognise a bubble beyond all doubt before it bursts. A significant and persistent deviation from the long-term trend (point 1) can, however, be regarded as a very good indicator of a bubble if there is little to suggest that a structural break has occurred in the respective market, for only a structural break could justify the deviation from the trend. Such sudden breaks are more unlikely to happen in the comparatively established real estate market than in developing markets for which there is a dearth of reliable information. Bubbles are hard to foresee

Asset bubbles in Japan: a comparative scenario

The problems associated with a bursting real estate bubble typically follow the trend seen in Japan at the end of the 1980s: in the important business regions (Tokyo, Osaka, Kyoto), prices of condominium apartments rose at double-digit rates every year from 1987 to May 1991, in fact by over 30% in some years. The ratio of average house price to per capita GDP topped the long-term average by nearly 50%

See, for example, Stiglitz, J. (1990), Symposium on Bubbles, in: Journal of Economic Perspectives, Spring edition, pp. 13-18. Abraham, J.M., Hendershott, P (1996), .H. Bubbles in Metropolitan Housing Markets, in: Journal of Housing Research 7 pp. ,2, 191-207 .

Economics

Frankfurt Voice

February 21, 2003

at the peak. During the same period (1986 to mid-1991) the price of land for residential and commercial real estate rose at a similarly dynamic pace. The repercussions of the bubble are still noticeable today. Housing prices continue to fall, the price per square metre paid in Tokyo in 2002 being only 50% of the amount that changed hands in early 1991. Land prices are also still decreasing at a rate of almost 10% p.a., with the price of land for residential property having retraced over 60%. At the beginning of the 1990s, Japan witnessed not only the bursting of the real estate bubble; it had just seen equity prices fall from their peak.2 Even though the fluctuations in the equity market were much more pronounced, the patterns of the two asset bubbles are very comparable. Three phases can be recognised: the first covers the development of the bubbles. The equity bubble started in 1986 and ended in early 1990. The upswing in the housing market began with a time lag of about one year and petered out in spring 1991. The second phase covers the implosion. Equity and real estate prices fell dramatically in a slump that lasted about three years. Since the mid1990s the pace of adjustment has slowed, but the trend in the equity and the property markets has continued into 2003 (third phase). All the capital gains accrued during the bubble have been fully eroded.3 This bursting of one bubble after the other is the very reason for the worries in Europe and the US that the property price trend could reverse and plummet in the wake of the stockmarket plunge.

Apartments: price per unit

7 JPY 10 mio. 6 5 4 Metro area Kinki area 3 2 1 0 77 82 87 92 97 02

Kinki = Central Japan, North West Japan, Kyoto, Osaka Metro: Tokyo Metropolitan area
Source: Japan Real Estate Institute

Japan: Urban land price index 6 large cities

600 March 2000 = 100 industrial commercial 500 400 300 200 100 residential 0 60 66 72 78 84 90 96 02
Source: Japan Real Estate Institute

Macroeconomic consequences of a bursting real estate bubble

A bursting bubble in the real estate market affects not only the home owners, whose net worth shrinks. The entire economy is drawn into the maelstrom of real estate deflation. This is attributable to the close, positive relationship between private consumption and the volume of private assets (wealth effect). Household income is the primary determinant of private consumption. Since wealth can ultimately be understood as the present discounted value of a future income stream, and people tend to smooth their consumption in light of future income factors, their wealth level has a direct effect on private consumption. A massive decline in value not only weighs on households who have bought assets at the wrong time; it also slows the entire process of economic growth. Residential property plays a special role in this regard since many households have invested much of their wealth in this asset class. In Germany, for instance, total household wealth runs to some EUR 8,000 bn and more than half this sum is invested in fixed assets, most of this being in real estate. By contrast, German households hold just EUR 525 bn in equities. Households in other countries of Western Europe also have 30-40% of their wealth invested in residential or commercial property. Even in the USA, where equities play a bigger part in retail investment portfolios, households real estate

House price/GDP per cap*

30 45% above average

25 20

For Japan, the changes in the stock market explain more than two-thirds of the variation in land prices. See Basile, A., Joyce, J.P (2001), Asset Bubbles, Monetary . Policy and Bank Lending in Japan: an empirical Investigation, in: Applied Economics 33, pp. 1737-1744. However, this process is also attributable to Japans structural problems. With most asset bubbles, the level after they burst is higher than before the boom. See Garcia, G.G.H. (2001), Measuring the Bubble in Mature and Emerging Equity Markets, in: Kaufman, G.G. (ed.), Asset Price Bubbles: Implications for Monetary and Regulatory Policies, Chicago, pp. 41-62.

15 Average 10 1977 1982 1987 1992 1997 2002 *Tokyo Metro Region
Source: Japan Real Estate Institute

Economics

February 21, 2003

Frankfurt Voice

assets are four times higher than their equity holdings. For that reason, consumer expenditures react more than twice as strongly to changes in real estate prices as to changes in equity prices.4

Consumer spending reacts strongly to changes in real estate prices

Determinants of housing prices

Housing prices may be subject to pronounced fluctuations even in the absence of speculative anticipation. The main reason is that supply can adjust to changes in demand only with a time lag. So if there is a positive demand shock, the housing market can only return to equilibrium on the back of price increases. The major price-driving fundamentals are:5 1. Real income: The demand for housing, like most goods, reacts positively to changes in disposable income. 2. Population growth: It is very difficult to forecast to what degree migration will increase the population of a region. An unexpected influx raises demand, and prices increase as a result. 3. Long-term interest rates: Since most purchases of residential property are debt financed, the level of the associated debt service is crucial. When mortgage rates fall, higher house prices do not necessarily lead to a heavier financial burden for households. 4. Equity market: Since stockmarket trading is all about expectations, share price trends are in normal circumstances an indicator of future economic performance. This suggests that the equity market is a leading indicator for the housing market, while at the same time the two asset classes, equities and real estate, compete with one another within portfolios. As the share market cools, investors increasingly abandon equities for safe havens. The question of which effect is predominant is simply empirical. 5. Housing completions: Finally, an increase in supply tends to curb price upcreep. Of course, the factors involved do not always carry equal weight. We therefore confine our analysis to the key factors for the respective country. Unexpected population growth has a strong direct price effect

Case, K., Quigley, J., and Shiller, R., (2001), Comparing Wealth Effects: The Stockmarket versus the Housing Market, NBER working paper w8606. See OECD (2000), World Economic Outlook, Asset Prices and the Business Cycle, May 2000, Paris.

Economics

Frankfurt Voice

February 21, 2003

USA
Average house prices rose by 8.5% yoy in the United States in 2002. The growth was particularly strong in the Midwest and the Northeast, at over 10%; this was about 3.5 percentage points (pp) higher than the long-term average. Even in recessionary 2001, house prices climbed by close to 5%. The trend is in keeping with the fundamental data, at least for the overall market. Household income is the main determinant of house prices. Per capita GDP shrank slightly in 2001, but disposable income grew no less than in the previous years thanks to the expansionary fiscal policy of the Bush Administration. The ratio of average house price to per capita GDP an indicator of whether house prices have decoupled from the general economic trend has risen steadily over the past few years. The level reached at the end of 2002 is thus only 1% higher than the usual fluctuation range (a standard deviation) around the average value of the past 25 years. In Japan, the figure exceeded the corridor by over 25% in 1990. This (slight) overshooting of the long-term trend is justified, given the development of mortgage interest rates. Over the past two years, mortgage rates eased by roughly 2%. Since it is common in the USA to pay back mortgage loans before they fall due in order to take out a new mortgage on more favourable terms, not only households with brand-new contracts benefit from the low interest rates. Mortgage refinancing has become particularly appealing not least because of the substantial decline in transaction costs the refinancing fees since 1998.6 For many households, the aggressive rate cuts of the past two years had the effect of raising their disposable income. No serious deviation from the trend Our model for the US housing market, which incorporates the real rate of GDP growth, mortgage interest rate and changes in the Dow Jones, accordingly signalled a rapid rise in house prices for 2001 and 2002. The model underestimates the recent development; however, this may be attributed to the fact that current expectations are explicitly left out of the picture. Given the still very strong population growth and the comparatively high potential growth, this deviation is not serious. Real estate markets are regional in nature. Even though the overall market is in line with the fundamental data, there are a few hot spots on the coasts. Most of these cities benefited in the past from the above-average growth of employment. In addition, the housing supply has increased only moderately over the last several years. But price increases of over 20% p.a. in New York and San Diego are hardly sustainable. The growth rates there are expected to subside over the coming years. A few locations might see (slight) downturns. In the light of the very low interest rates and the relatively good growth prospects, though, it would be unrealistic to expect Japanese conditions in the housing markets.
House prices and GDP - USA
7 House prices/ GDP per cap (left) 6 Average 600 500 400 300 5 House prices (right) 100 1975=100 4 75 78 81 84 87 90 93 96 99 02
Sources: National Association of Realtors, DBR

200

18 16 14 12 10 8 6 4 2 0

House prices & mortgage rate

Mortgage rate (left)

600 500 400 300 200

House prices (right) % 1975=100

100 0

80 82 84 86 88 90 92 94 96 98 00 02
Sources: National Association of Realtors, DBR

House prices in the USA

12 % yoy 10 8 6 4 Actual Model 2 0 -2 -4 81 83 85 87 89 91 93 95 97 99 01 03
Sources: National Association of Realtors, DBR

Strong regional differences

Deviation from average growth rate in percentage points 2000 Nassau-Suffolk New York San Diego Sacramento Washington DC Los AngelesLong Beach
Source: Rreef

2001 8.9 3.3 3.6 12.8 8.6 3.5

2002 17.8 12.8 12.4 11.1 9.1 8.9

5.8 7.3 10.0 2.2 -2.8 2.1

Deep, A., Domaski, D. (2002), Housing Markets and Economic Growth: Lessons from the US Refinancing Boom, in: BIS Quarterly Review, September 2002, pp. 3745.

Economics

February 21, 2003

Frankfurt Voice

UK
In the United Kingdom, house prices soared by nearly 20% yoy in 2002, with the increase in fact even accelerating in the second half of the year and continuing unbroken in January 2003. Prices had already jumped noticeably in the previous five years. At end-2002 an average home cost twice as much as at the beginning of 1997. The surge was particularly noticeable in London and the surrounding area. From 1997 to 2002 house prices went up by more than 16% p.a.; growth rates of this magnitude result in a doubling of prices within four years. The last time prices escalated similarly was in the late 1980s. At the time, (nominal) house prices rose for six years in a row before the market collapsed in 1990. By the end of 1993 house prices in London slumped by a nominal 30%; the downturn for the UK approached 17%. Since inflation ran at 6-8% in the early 1990s, the loss of value was even greater in real terms. Despite the difficulties in the business environment over the past two years, the British economy expanded by a real 2.2% in 2001 and 1.6% in 2002. The UKs growth prospects for 2003 and 2004 are much better than Eurolands. Moreover, the demographic time bomb is ticking more slowly in the UK than on the Continent the UN estimates that the British population will continue to grow until 2025. Germany, Italy and Spain are expected to see their populations start to shrink some 20 years earlier. House prices outpacing GDP Household income has been unable to keep pace with the burgeoning of house prices, though. The ratio of average house price to per capita GDP is heading towards the 1989 peak, exceeding the long-term average by more than 25% in early 2003. However, focussing solely on this ratio distorts the picture in two ways: first, the British economy tumbled into deep recession in the early 1990s, as GDP stagnated between 1990 and 1992 (calculating for the period as a whole) and the number of unemployed rose by roughly 75%. This type of development is unlikely to recur in the coming years. Second, the Bank of England boosted the base rate by nearly 7 pp from 1988 to 1990. That had a significant effect also on the going mortgage rates. The situation is completely different today. Starting from the already low level of 6%, the base rate was nudged down over the past two years to a historical low of 3.75% (as of February 6, 2003) a whopping 11 pp less than in the comparable period between 1990 and 1992. It follows that the higher house prices do not lead to an equal rise in financing costs. Our model, which concentrates above all on real income and long-term interest rates as explanatory variables, excellently reflects the development of house prices up to 2001, and signals a strong surge also for 2002. However, it also shows that the explosive growth in 2002 is not fully explained by the fundamental data given. Either belowaverage growth over a couple of years or a short period of declining prices can return the trend to the normal path. Growth will probably slow in 2003, with slight declines in some sub-markets. This will probably apply to the upmarket segment in London in particular if earnings in the investment banking sector remain weak. A lasting crisis as in 1990 is unlikely, though, considering the favourable growth expectations and the advantageous level of mortgage rates.

House prices in UK
1600 1974=100 1400 1200 UK London 1000 800 600 400 North 200 0 74 78 82 86 90 94 98 02
Source: Nationwide Building Society

House prices and GDP

8 7 6 5 Average 4 3 2 74 78 82 86 90 94 98 02
Sources: Nationwide Building Society, DBR

1200 House prices/ 1974=100 GDP per cap (left) 1000 800 600 400 House prices UK (right) 200 0

Mortgage rate and house prices

30 % yoy 20 Mortgage rate (right) % 18 16 14 12 10 8 6 0 House prices (left) 84 86 88 90 92 94 96 98 00 02
Sources: Nationwide Building Society, CSO

10

4 2 0

-10

House prices in the UK

25 % yoy 20 15 Model 10 5 0 Actual 83 85 87 89 91 93 95 97 99 01
Sources: National Association of Realtors, DBR

-5 -10

Economics

Frankfurt Voice

February 21, 2003

Spain
Spanish house prices increased at double-digit rates for the fourth time running in 2002. In fact the growth rate picked up to 22% yoy in Madrid last year. Prices have doubled in the two metropolises of Madrid and Barcelona since early 1998. This tempestuous growth calls to mind the last rally in the late eighties, which came to a sudden end. Back then, too, house prices posted double-digit annual growth rates from 1988 to 1991. However, the upswing ran out of steam in 1992, and nominal prices trended sideways for three years. The price level was actually down about 20% in real terms by 1998. Relatively speaking, the value of houses in Barcelona proved to be more stable; however, the real loss there, at over 10%, was by no means marginal. Doubts as to whether the growth of recent years is sustainable thus seem warranted, even though the rates of the past four years were not quite as high as those of the late eighties. In Spain, too, the development of real household income is the main determinant of price movements in the housing market. The economy expanded at a rate of over 4% p.a. from 1997 to 2000. Spain has not been fully spared the effects of the cyclical slowdown in Euroland, but its economy is set to expand at about twice the pace of Eurolands GDP as a whole in both 2002 and 2003, at a rate of about 2%. Despite the robust economic growth, the ratio of average house price to per capita GDP nearly matches the 1991 level, and thus surpasses the long-term average by close to 15%. However, it would be wrong to interpret this as a systematic overvaluation in the housing market since three more factors stimulated demand over the past few years. Low interest rates providing momentum First, Spains efforts to meet the convergence criteria before the launch of the euro drove down long-term interest rates to a third of the level seen in the early 1990s. This reduced the financial burden on home buyers. Second, the decline in the equity markets increasingly switched the focus to residential property as a safe haven for investment. Third, the Spanish population grew much more quickly after 1996 than in the previous years, expanding by approximately 1 million from 1996 to 2001. In the five years hitherto, it increased by only 350,000. A direct comparison of average house price to per capita GDP then proves misleading. Our model for the Spanish housing market is based mainly on the variables GDP growth, long-term interest rates and equity market growth (MSCI Spain). It reflects (in trend form) both the pronounced declines in house prices at the beginning of the 1990s and the strong recovery of recent years. The fundamental data explain the price upcreep in the housing market for Spain as a whole. The Spanish economy will probably fail to match the trend growth of recent years in 2003, but a recession is unlikely. The interest rates set for the euro area as a whole tend to be on the low side for Spain. Finally, the single currency area encourages the acquisition of property across national borders. This could be evidenced by the fact that house prices on the Balearic Islands have skyrocketed (+97% since 1995). Nevertheless, Spanish house prices look set to move up much more slowly in the coming years, and in isolated cases declines cannot be ruled out. For one thing, the population is unlikely to continue expanding as rapidly as in 2000 and 2001. For another, GDP growth is more moderate than before. However, a painful crash is not on the cards.

House prices in Spain

600 1987=100 500 Barcelona Madrid 300 200 Spain 87 89 91 93 95 97 99 01 100 0
Source: Ministerio de Fomento

400

House prices and GDP

9 1987=100 8 7 6 5 4 87 89 91 93 95 97 99 01
Sources: Ministerio de Fomento, DBR

500 450 400 350 300 250 Average Price per m/ (left) GDP per cap. (left) 200 150 100 50 0

House prices Spain (right)

House prices and interest rates

16 % 12 1987=100 10Y gov. bonds (left) 500 450 400 350 300 250 200 150 House prices Spain (right) 89 91 93 95 97 99 01 100 50 0
Sources: Ministerio de Fomento, DBR

House prices in Spain

25 % yoy Model 20 15 10 5 Actual 0 -5 -10 90 92 94 96 98 00 02
Sources: Ministerio de Fom ento, DBR

Economics

February 21, 2003

Frankfurt Voice

Germany
Since the end of 2002, Germany has also been confronted with the issue of whether there is a price bubble in the housing market. This question can be roundly rejected as inapplicable to east Germany. Housing prices there have been falling for seven years, and in the light of roughly 1.3 m vacant homes and a declining population, it could be argued at most that east Germany still feels the scars of a building bubble sponsored by government funds. The degree of upcreep in west Germany is minor (roughly 2% p.a.). In some conurbations (e.g. the areas around Munich, Stuttgart and Frankfurt a.M.), house prices are rising at an above-average pace, but much more slowly than in New York, London or Madrid. The uptrend is weaker in Germany than in the other three countries. However, house prices in Germany fluctuate comparatively little. Cyclical patterns can be observed, but movements are relatively moderate. Interestingly enough, the trend growth of west German house prices has cooled appreciably over the past few decades. This is, not least, a reflection of Germanys obvious growth weakness.7 East Germany: subsidy-induced bubble has burst Since 1975, the ratio of average house price to per capita GDP has fallen by roughly one-third. This holds true also for the west German conurbations; house prices there have risen at an above-average pace, but the economy also expanded more rapidly there than in the peripheral regions. Besides, the cited ratio impressively shows the adjustment processes in east Germany. In the initial years following German unification, prices skyrocketed. Real estate prices largely decoupled from the regions economic strength. The mismatch was unsustainable; a return to the fundamental values was inevitable. This situation persists in east Germany house prices there were still excessive in relation to economic strength in 2002, if the west German readings are used as benchmark. The development of house prices in west Germany can be illuminated very well using a simple model which factors in economic growth and equity market performance. For 2002, the model signals an even stronger increase than that actually observed. Moreover, considering the favourable level of interest rates, which in principle makes higher house prices affordable, there is no sign of a bubble in the west German housing market not even in the conurbations. Nevertheless, the decline in housing completions suggests that bottlenecks could arise in the business centres in the years ahead. This holds especially if German economic policy and the global business environment pave the way for higher growth. However, supply will probably tighten especially in the rental-property segment and not so much in the owner-occupied market. Higher prices then could not be construed as a bubble, but instead as a normal, and thus predictable, market response.

House prices in Germany

130 120 110 West East 100 90 80 70 Munich 1990=100 75 78 81 84 87 90 93 96 99 02
Sources: Bulwien AG, DBR

60 50 40

House prices/GDP per capita

28 East 24 20 16 West 12 8 75 78 81 84 87 90 93 96 99 02
Sources: Bulwien AG, Fed. Stat. Office,,DBR

Munich

House prices and mortgage rates

12 % 10 House prices West (right) 1990=100 120 110 8 100 6 10Y--mortgage rates (left) 4 82 86 90 94 98 02
Sources: Bulwien AG, Bundesbank, DBR

130

90 80

House prices in west Germany

% yoy Model

10 8 6 4 2 0

Actual
7

-2 -4 -6

Bergheim, S., Neuhaus, M. (2002), Bottleneck labour an empirical growth analysis, Frankfurt Voice, More growth for Germany, Deutsche Bank Research, December 4, 2002.

78 80 82 84 86 88 90 92 94 96 98 00 02
Sources: Bulwien AG, Fed. Stat. Office, DBR

Economics

Frankfurt Voice

February 21, 2003

Conclusion
Ever since the euphoria in the Neuer Markt evaporated and the related equity bubble burst, worries that new asset bubbles could emerge in other markets are entirely justified. It is quite understandable that some observers see the risk of overheating when the price of housing rises at an above-average pace. Such discussion is in fact helpful, because it keeps expectations from becoming overly optimistic. Nevertheless, it should not blind anyone to the economic fundamentals. Our investigation shows that US house prices are slightly overvalued, but not to an unusually strong degree. Overheating is visible in some regional sub-markets of the United States; given the growth outlook for the USA and the historically low interest rates, there is no compelling argument for a price slump. However, the end of the rally is in sight. A similar case can be made for the Spanish and British housing markets. Price trends there are largely in line with the fundamental data; especially the favourable interest rates rule out a comparison with earlier periods of high house prices. Houses in the UK seem to be moderately overvalued, but no long-lasting crisis looms. Minor price declines in one or two years cannot be excluded, though. The debate surrounding the German market is given absolutely no substance by the fundamental determinants. Only the trend in east Germany in the early 1990s allows comparison with a speculative bubble. However, it would be more appropriate to speak of a subsidy-induced bubble, and efforts to reduce it started back in the mid-1990s. Caution is advised in two respects, though, since risks are at hand in some sub-markets in Spain, the UK and the USA. First, the basic allclear given above is predicated on an actual, pronounced slowing of house prices in 2003 and 2004. If this does not happen, serious tensions could emerge in two years time. The later the recovery of the world economy and the more serious the economic effects of the Iraq conflict, the earlier they are likely to become evident. Second, it is not the fundamental data that are ultimately crucial for price developments, but rather how the data are interpreted by investors. The greater the number of market participants who believe the real estate market is overvalued, the greater the likelihood of a setback, albeit not a trend decline. Tobias Just, +49 69 910-31876 (tobias.just@db.com) The end of the rally is in sight ...

... but a painful crash is unlikely

However, caution is advised

10

Economics

Frankfurt Voice
EU Financial Market Special
Towards a Single Euro Payments Area February 13, 2003

While the launch of the euro made a single currency area in the EMU a reality, Euroland is still seen as foreign in payment matters. A multitude of different payment instruments and systems as well as legal rules in the individual Member States have so far constituted an obstacle to the single payment area. The result of this is comparatively high costs for cross-border retail payments within Europe. The European banking industry has launched an initiative with the aim of harmonising European payments within a reasonable timeframe but for this ambitious undertaking to be a success the banks require the support of the European Commission and national regulatory authorities. IAS: New financial reporting rules in the European Union January 29, 2003

Following the adoption by the EUs council of Ministers and the European Parliament, roughly 7,000 listed companies domiciled in the EU are required to prepare their consolidated financial statements according to the International Accounting Standards (IAS) with effect from 2005. The new uniform set of accounting standards shall replace fifteen national accounting systems each varying greatly from the other. This is a milestone on the arduous journey to a single European financial market. Non-publiclytraded companies will have the option to use IAS for their consolidated financial statements to help them prepare for an IPO or a rating. The decisive factor now is the en bloc endorsement of all existing IAS in the EU so that the timetable for the Regulations coming into force is not threatened and the emergence of a European IAS can be avoided.

The future of Clearing and Settlement in the EU

January 10, 2003

Restructuring the C&S industry is a key element in the quest to increase the efficiency of Europes securities markets. The C&S landscape is highly fragmented, imposes disproportionate costs on market participants and is, all in all, inadequate for the single EU financial market. How to reform the industry is a subject of fierce debate across the political, business and academic arenas. The first article in this issue disentangles the highly complex structural issues and presents the initiatives currently being developed at EU level. The second article argues that the way forward is to make existing C&S systems interoperable and to connect them by means of a Central Securities Settlement Institution. EU Prospectus Directive on the home straight December 16, 2002

At the beginning of November the EU Council of Ministers accepted the draft EU Prospectus Directive, which will in future permit securities to be offered for sale throughout the Community on the basis of a single prospectus. The measure is designed to make it easier to offer securities for sale on a crossborder basis, and is thus a major step towards the creation of a European capital market. Although the Prospectus Directive that has now been adopted by the Council of Ministers still needs amending in a number of important respects during the remainder of the legislative process, the project now seems to have overcome significant initial difficulties and reached the home straight. All our publications can be accessed, free of charge, on our website www.dbresearch.com. You can also register there to receive our publications regularly by e-mail.

conomics
ISSN 1619-3245

Germanys broadband networks - innovation on hold Information & communication technologies - panacea for traffic congestion? Germanys venture capital market: prospects remain dim Free software, big business? E-government: large potential still to be tapped Business locations in a networked world - No death of distance Taxation of e-commerce - looking for solutions Biometrics - hype and reality Technology and work - the 21st century and its challenges Online brokerage in Germany 2002: strategy changes and market shakeout B2C trading in the automotive industry: the internet is primarily a source of information Framework conditions for e-commerce: all in good order? Virtual marketplaces in the chemicals sector: B2B turnover expanding strongly International capital markets of the future - the impact of the internet E-commerce and the WTO

February 17 2003 , December 11, 2002 December 5, 2002 November 22, 2002 October 31, 2002 August 27, 2002 August 1, 2002 May 22, 2002 April 29, 2002 April 19, 2002 April 18, 2002

February 11, 2002 January 24, 2002

December 10, 2001 December 4, 2001

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