financial fragility applied to the real estate sector: the case of bogota between 2003-2012
TRANSCRIPT
Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012
THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCEKansas City, Missouri
September 25–28, 2014
By:GONZALO CÓMBITA MORA
FACULTY OF ECONOMICS AND SOCIAL SCIENCESUNIVERSIDAD DE LA SALLE
BOGOTÁ, COLOMBIA
CONTENTS
1) Introduction 2) Backgrounds3) Theoretical
framework4) Empirical evidence5) Conclusions
Bogota’s skyscraper new project the BD-BACATA
1.INTRODUCTION
1999’s crisis, similar scenario external and internal boom.
Housing prices have been going up Government´s point of view:
locomotives (primary - real state sectors)and strong fundamentals.
Mainstream vs Post Keynesianism Housing bubble = triggers
macroeconomic crisis (2008) Empirical evidence: financial
fragility
2. Backgrounds• Mainstream’s point of view:a. Exuberance of the
fundamentals b. Decisions are taken by
rational agentsc. Supply and demand
determinants: income, land price, interest rate, builder’s cost and normal recovery after 1999’s crisis.
d. Test possible misalignment: current prices and long run ones.
• Heterodox’s point of view:a. Marxism b. Data mistakes: Housing
Prices, land prices and leasing.
c. New data: bubble has been making
d. Results: house’s price cause increases in land’s price, Rise in prices are symptoms of bubble
e. There are few analysis: work to do for heterodox
3. THEORETHICAL FRAMEWORK• Mainstream’s perspective:a. Isolating market and
individualsb. Rational agents and
optimal behaviorc. Money does no count
and Pure exchange (r)d. Bubble is not possiblee. Fundamentals are based
on micro decisions
HrYP
PrYFH
PrYH
H
Hd
Hd
)(
,,,
;)(
*
*
)()()()(
*
3. THEORETHICAL FRAMEWORK• Post keynesian’s perspective:a. Uncertainty and procedural
rationality: don´t drive the economy towards full equilibria
b. Monetary economy: fuels Bubble & banking role
c. Macroeconomic phenomena: housing bubble as a symptom (fallacy)
d. Housing Bubble is symptom of macro instability
e. Financial fragility: private sector (Households) and foreign sector (TNT, volatility and exogenous terms of trade)
4. Empirical data4.1 Descriptive analysis:A. BP fragility Dutch disease: real vs financial Crowding out Free trade agreement T-NT: yield crisis Expectations: expand bubble Primary exports vs manufactured
B. Private fragility Increasing indebtedness Elastic fiscal and monetary policies
4.2 Time series analysis: Two strategies: prices or credit
supply First strategy-Variables: Stationary test VAR-VEC
4.1 Descriptive analysis: sectoral balance
• Deficit zero• External and private
deficit • Causes?• Consequences: two
fragilities
20002001200220032004200520062007200820092010201120122013
-5
-4
-3
-2
-1
0
1
2
3
4
5
(G-T)/Y (X-M)/Y (S-I)/Y
A.1 External fragility
Low inflation rate scenario
Nominal and real exchange rate appreciation
Dominance of financial account (Bresser-Pereira)
Yield crisis: Double Crowding out-(within exports and TNT-RSS )
20002001
20022003
20042005
20062007
20082009
20102011
20122013
7
7.2
7.4
7.6
7.8
8
8.2
4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
lnRLnE
20002001
20022003
20042005
20062007
20082009
20102011
20122013
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
PortafolioFDI
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20002001
20022003
20042005
20062007
20082009
20102011
20122013
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
outflow of foreign earnings/FDI
• Paradoxical situation: Boom in primary commodities = current account deficit
• Boom benefits foreigners o foreign firmsConsequences: financial fragility on BP
• Fuel real state bubble
20002001
20022003
20042005
20062007
20082009
20102011
20122013
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
FDI outflow of foreign earnings
20002001200220032004200520062007200820092010201120122013
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
Goods and services Net factor income Net transfers
Agriculture Mining Manufacture Real state sector
Whole economy
-4
-2
0
2
4
6
8
10
12
14
o1-o4o5-o8o9-13
• Current account deficit: Net factor income and goods and services.
• Sectorial Growth performance: Winners and losers.
2000-I
2001-I
2002-I
2003-I
2004-I
2005-I
2006-I
2007-I
2008-I
2009-I
2010-I
2011-I
2012-I
2013-I
2014-I4.10
4.30
4.50
4.70
4.90
5.10
5.30
5.50
LnTILnIPVN
2000-I
2001-I
2002-I
2003-I
2004-I
2005-I
2006-I
2007-I
2008-I
2009-I
2010-I
2011-I
2012-I
2013-I
2014-I4
5
6
7
8
9
10
4
4.2
4.4
4.6
4.8
5
5.2
5.4
5.6
lnNetinflowLnIPVN
Housing price and external boom Terms of trade: Dutch
disease (financial and real) Net inflows: FDI+portfolio
(from 2010) Saving excess thesis Expectations, foreign
lending, speculation feedback on real state sector
Fragile fundamentals, appreciation due to capital inflows, crisis yield and available credit resources fuel demand of housing
A. 2 Private sector Increasing indebtednessCredit elasticityFiscal and monetary
policy: interest rate, spending
Speculation: real state market
Private Indebtedness: • Loan portfolio:
consumption-Mortgages
• External debt: banking sector
5/17/2
002
1/17/2
003
9/17/2
003
5/17/2
004
1/17/2
005
9/17/2
005
5/17/2
006
1/17/2
007
9/17/2
007
5/17/2008
1/17/2
009
9/17/2
009
5/17/2010
1/17/2
011
9/17/2
011
5/17/2
012
1/17/2
013
9/17/2
013
5/17/2014
- 10,000.0 20,000.0 30,000.0 40,000.0 50,000.0 60,000.0 70,000.0 80,000.0 90,000.0
Loan portafolio
Mortgages Consumtion
20012002
20032004
20052006
20072008
20092010
20112012
12000
17000
22000
27000
32000
37000
42000
47000
52000
Private debtPublic debt
2000-I
2001-I
2002-I
2003-I
2004-I
2005-I
2006-I
2007-I
2008-I
2009-I
2010-I
2011-I
2012-I
2013-I
2014-I11
11.5
12
12.5
13
13.5
14
14.5
3
3.5
4
4.5
5
5.5
6
ln housing credit LnIPVN
Increase in credit´s elasticity Increase in correlation
between credit consumption and mortgages: >5 years
• Public policies:Government spendingRate of interest
200218200501 200643200821200950 2011292013080.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Hipot $Tasa $ SubsidiadaHipot UVRTasa UVR Subsidiada
2,0002,0012,0022,0032,0042,0052,0062,0072,0082,0095.5
5.7
5.9
6.1
6.3
6.5
6.7
6.9
7.1
7.3
7.5
2
2.5
3
3.5
4
4.5
5
5.5
LNSRSSLnIPVN
5. Conclusions • Mainstream has been unable to
understand Bogota’s Housing bubble
• Post Keynesian alternative: external and internal fragility
• External fragility: Increasing outflows (FDI earnings, crowding out, portfolio investment).
• External boom feeds housing bubble: Expectations, fragile fundamentals, appreciation due to capital inflows, yield crises, available credit resources fuel demand of housing.
• Internal fragility: increasing indebtedness of private sector and policy of zero deficit in public sector
• High credit elasticity, invest opportunity in speculative assets (financial and real), import linkages, fiscal and monetary policy.
• Housing Bubble is a macroeconomic phenomena
• Greece and Spain´s adjustment• Long run: Lower rates of growth.