This may very well be the case. In the case of the UK, of course, this may also be facilitated by people relocating from Poland.

Maybe you think I joke here, but last year in Spain 1 mortgage in 4 was from a (recent, since there are hardly any others) migrant. Allowing multiple salaries to be attached to a single mortgage is one of the recent “financial efficiencies in mortgage markets”.

Of course in the US, after the sub-prime bust, this may now be more difficult.

“Whether it was a “boom” or not is a question of definition”

Yep, as I say I am actively working on this at the moment. The best definition of a “boom” I have found to date is the one I reproduce below from OECD economists David Rae and Paul van den Noord (who are really pretty on the ball about all this):

“Between 1960 and 2004, 49 residential construction booms have occurred in 23 countries for which data is available. A boom is defined (rather generously) as a rise in the level of real per capita residential investment of at least 15% over a five year period. In order to avoid identifying false peaks and data blips, a peak is defined as the highest point in a window of the preceding four years and the subsequent three years. By construction, the latest peak that can be identified is 2002; the analysis therefore omits the housing booms that are currently underway. In the cycles that have been identified, the average increase in real per capita residential investment from trough to peak is around 40%. The largest occurred in Korea from 1973 to 1978 (where investment rose by 160%). The trough to peak increase has exceeded 50% in 16 cases.”

By this definition Belgium has not had a housing boom in the last few years (and neither, though you hadn’t spotted this one, has Italy at the turn of the century). Of course, as they say, this is a “rather generous” definition of a boom.

Indeed, some of these “booms” may be better classified as bubbles, as the following on hard landings makes clear:

How common are soft landings? If a soft landing is defined as a relatively small reduction in the investment rate, they are not especially common. There have been only four cases where the decline in per capita residential investment has been smaller than one third of the increase that occurred during the boom years (these are the Netherlands after 1978, Belgium after 1990, the United Kingdom after 1998 and Finland after 2000). Soft landings are more common if they are defined as gradual declines, i.e. where it takes at least three years to hit the trough. There have been around 20 examples of these. But all of these were comparatively deep declines. If a soft landing is defined as something that is both mild and gradual, there has not been a single case out of the 49 boom bust cycles.”

So, on the generous definition of soft landings we have 20 booms, and - by subtraction - 26 bubbles or semi-bubbles.

More points of note, Belgium seems to have had a “boom” at the end of the 80s. Will this be the last one. The Netherlands had one at the end of the 90s. Again, the same question. And what has happened with Finnish housing. I think looking at all these kind of “borderline cases” will teach us a lot.

In that sense, detailed study of German or Japanese residential construction activity would seem to offer relatively little in the way of sensitive information, since these markets seem to be well and truly “done”.

Of course a more interesting question - and indeed the one I am presently thinking about - is why there are these booms in the first place, and what the whole pattern is all about. Decoding the information we have, this is the issue.

“For the EU-8 plus Romania and Bulgaria, I view the next 15 years as a race between growth and demographics.”

Yep. Agreed. The thing which worries me most is what happens when the financial markets wake up to all of this.

Housing is already slowing in the Baltics, while unemployment is dropping incredibly rapidly in Poland (almost “too rapidly”).

“Note that these countries still have a little time left.”

Yep, but if any of them manage to dig themselves into a temporary hole, it may cost them a lot to climb out again. And hardly a day passes at the moment when I don’t find myself surprised by the rapidity with which everything is happening there.

“Albania and Kosovo are about 10 and 20″

Yep, incredibly Albania could find itself as a country which is very much in vogue in the decade 2010 - 2020.

“However, these countries are about to be hit by a double whammy: the postwar baby boomers will start retiring, and the “empty cohorts” born in the 1990s will start (not) entering the job market. So dependency ratios are going to start rising rapidly after 2010.”

“In the case of Germany, you keep saying that German exports must grow. Must they? They’re already running a trade surplus of ~$100 billion/year. By the middle of the next decade, even without growth, they’ll own a couple of trillion dollars of foreign assets. That’s going to pay a lot of pensions.”

Good point. Really I haven’t gone into the implications of this part yet, in the same way as I am avoiding thinking about what happens if and when Germany and Japan ever where to reach a negative savings stage. All of that is so far out in the future that the topic becomes very speculative. I am trying to focus on what is happening now.

And here you need to think about who own what, and who the Federal government can tax. Basically they can’t keep piling 3% on the VAT rate every other year. So they need to grow so that revenue can grow sufficiently quickly to meet obligations to the rising dependent population. At the moment we can see what happens when they have a good year, the government has funds, but you also have to think about what happens when they have a bad year.

So what I am focused on here is the sustainability of government finances, over a fairly short time period - say between here and 2020 - and how the export dependence can impact on this.

“IOW, I agree that a demographic sea change is coming, but it’s going to have very, /very/ different effects on different economies.”

I agree. And I hope, indeed I imagine we all hope, that Germany will be one of the winners here, but we would not be rational animals if we did not ask ourselves the hard questions about whether our hopes are justified.

“It’s testable; but since only a handful of nations have median ages over 41, it may take some time before we can say it’s been tested.”

Yes, I agree. We now need to be rather patient.

“Hum. Belgium saw very sharp increases in both housing prices and housing starts in this decade. Whether it was a “boom” or not is a question of definition,”

Well spotted! I would say that apart from the Greek case we have already mentioned, the two countries which are causing me to scratch my head most at the moment are Belgium and Portugal.

Of course, since I am not trying to be excessively rigid here, but simply to indicate a general area for future research, there is still a lot of room for refining the argument. I think sometimes the way to move forward is simply to ask yourself interesting questions (knowing of course that you can make mistakes).

On the US, really I’m going to take the scoundrel’s path and take recourse to “US exceptionalism”. Which is another way of saying that I don’t know enough about how the US internal market works to feel I have anything very useful to say on this.

It is part of the received wisdom in the housing literature that housing markets are essentially local (what I am trying to do with median ages is find a convenient proxy for something, if I find one I could then start to think in more detail about what exactly it is a proxy for). Japan house prices have been either stationary or trending downwards for over a decade now, but downtown Tokyo prices have been booming over the last 18 months I think.

One trend is the move towards certain given urban areas. Another is the creation of a kind of global city network in some key city centres across the globe. In these cases property prices may accommodate more to those of the global peers than they do to local economic dynamics.

The same with the elderly population, and the migration towards the sun.

The property boom dynamics in Barcelona, Madrid and Valencia have been very different from those in Almeria, where the boom has been fuelled by a retiring population from the north of Europe moving south. They estimate that there are now 750,000 Brits alone who spend some of the year in a Spanish home they own.

So I suspect, and I only say suspect since I don’t know, that some of this may be going on in the US, especially in Florida.

On the other hand if you look at the median age for the US as a whole, there is still going to be plenty of life left for housing expansion once the current correction passes through the system.

Austria 41.3 (according to the CIA 2007)
Belgium 41.1
Sweden 41.1
Finland 41.6″

Hum. Belgium saw very sharp increases in both housing prices and housing starts in this decade. Whether it was a “boom” or not is a question of definition, but we’re talking price increases of ~~10% yoy, sustained over 5 years or more. To me that looks at least boom… ish.

“Bulgaria 40.9
Croatia 40.6
Slovenia 41.0

At this point I have no “stylised facts” to offer about the future path of these economies, except to say that the whole situation needs monitoring, to be so old and to have such low per capita GDP is obviously not good news.”

Here we agree. For the EU-8 plus Romania and Bulgaria, I view the next 15 years as a race between growth and demographics.

Note that these countries still have a little time left. Broadly speaking, birthrates remained high across Eastern Europe through the 1960s, fell slowly through the 1970s and 1980s, and then crashed hard after 1990.

There are exceptions to this pattern. Bulgaria and Slovenia had their birthrates fall faster and earlier, which is why they’re older now; Albania and Kosovo are about 10 and 20 years behind the curve, respectively, so they’re younger now. But they are exceptions, and the general pattern is clear.

What this means is that for most of the EU-8, dependency ratios are still low. There are a lot of adults between 30 and 60, but not a lot of kids, teenagers, or old folks.

However, these countries are about to be hit by a double whammy: the postwar baby boomers will start retiring, and the “empty cohorts” born in the 1990s will start (not) entering the job market. So dependency ratios are going to start rising rapidly after 2010.

Additional wrinkle: right now most of those countries have low TFRs. But after 2010, they’re going to have low TFRs /and/ low numbers of women in peak childbearing years. This means they have another five or ten years to raise TFRs and dig themselves out of the demographic hole that they’re in. If they don’t, it’s going to get much much harder.

Anyway. I’m not too optimistic for most of the EU-8+2. Romania, for instance, has seen rapid growth since 2001, but it’s still running a massive current account deficit. That’s just not going to be sustainable.

I suspect one ugly solution will be to just allow the elderly to be immiserated.

But Germany, Finland et al are something else entirely. Not only are those mature economies, but they’re highly efficient, very productive, and export powerhouses.

Long-term net exporter -> lots of foreign investments -> macroeconomic air bag against the demographic car crash.

In the case of Germany, you keep saying that German exports must grow. Must they? They’re already running a trade surplus of ~$100 billion/year. By the middle of the next decade, even without growth, they’ll own a couple of trillion dollars of foreign assets. That’s going to pay a lot of pensions.

IOW, I agree that a demographic sea change is coming, but it’s going to have very, /very/ different effects on different economies.

Doug M.
Doug M.

It’s testable; but since only a handful of nations have median ages over 41, it may take some time before we can say it’s been tested.

I will say, on one hand, that there’s a superficial plausibility here: you’d expect older societies to be less prone to a housing boom. I wouldn’t be surprised if this turned out to be true.

On the other hand, you used the word “societies” instead of “nations”. I think that was vagueness on your part, but if it’s not, you’re getting into some murky waters. Because the housing boom in the US stretches over some pretty elderly regions.

There’s no US state (yet) with a median age over 41.0. Right now the three oldest are Maine (40.7), Vermont (40.4) and West Virginia (40.3). All three of those states have shared in the national housing boom. (Casual googling suggestst that West Virginia has had a relatively smaller boom, while Vermont housing prices have grown even faster than the national average.)

Going down to the 39-40 range, we find Montana, Florida, Pennsylvania and New Hampshire. Florida, the fifth oldest state in the US (39.3) is ground zero for the housing boom, with both prices and number of housing starts growing even faster than the national average.

A significant element in the Florida superboom is the construction of… retirement communities. Hmm.

Would you view a housing boom in a >41 American state as falsifying your theory? Because by the next census — 2010/11 — there will probably be a couple of them.

Doug M.

First off, sorry again if I have sort of hijacked discussion here (aided and abetted by Doug) and turned this into a sort of master class on contemporary German macro issues.

In the end though this isn’t necessarily a bad thing, since many of the issues here are going to be central to the debate which is likely to emerge as we get into the autumn and winter. For example, the ECB is busy raising rates. Domestic consumption in Germany is congenitally weak, so how advisable is this? What is the impact we might see on German consumption moving forward of the combined 3% VAT rise, and the higher costs of borrowing? Both of these make it less likely that the domestic consumption component can pick up slack coming from any slowdown which might occur in export momentum. Thankfully US demand is holding up reasonably well despite the drop in housing activity, so at the moment this is one less worry for them, but this is also why I think we need to follow carefully events in the EU8, since any “correction” in activity there would be noted.

But really what I am trying to do in the comments here is draw attention to a number of contemporary macro “urban legends” about the path of the German economy. Some of these are:

1/. The Goldilocks, self-sustaining recovery idea. This is not a NORMAL recovery in Germany, but is extremely skewed towards export growth, this development is significant, yet in the popular press (including places like the Economist) this is barely recognised or discussed.

2/. The rapidly falling unemployment story. Unemployment IS falling as a result of job creation, but as I am arguing this process is a much more complex one than people seem to recognize. There is good news AND bad news here, but you only get to read the good news in most of the press articles.

3/. The wage inflation scare. What is most striking about all of this labour tightening that has been happening in Germany is that it is not producing the long forecast wage inflation. In fact y-o-y real german wages were only up 0.1% in Q1 2007 over Q1 2006, and this despite all the productivity gains we are talking about. We have the same story in Japan (where real wages are falling) and in Italy, as you note, wages are now starting to rise more slowly than prices. So why should this be happening as labour markets tighten? This is curious isn’t it?

4/. The idea that Germany is outsourcing low value added work, and keeping high value added at home. The reality behind German outsourcing is much more complex than it seems. As this chart here - which was produced by the IMF economists - shows, the domestic value added component has been a steadily declining share of German industrial output in recent years.

So something strange is happening here, especially since, as you note, German industry is becoming more capital intensive. Perhaps the answer is to be found, as Munich economist Dalia Marin argues, in what is happening to none-production workers. Based on the research of her PhD student Alexander Raubold - which was a study of the impact of the human capital shortage both Germany and Austria were experiencing given their declining young cohorts and weaknesses in the education system - Marin has been arguing that - at the level of non-production workers - German MNCs have been keeping the skill premium down by outsourcing a comparatively high share of the more skilled work from Germany (where the relevant labour is in increasingly short supply) to East Europe which has a relatively high quantity of the needed skills, and - as we all know - these are available relatively cheaply. Marin calls this process Maquiladoras in reverse.

Germany seems to have had the singular bad luck to have been experiencing these declining young cohorts at precisely the moment when demand for more skilled labour as a share of the total (the shift towards the knowledge intensive economy) was growing rapidly.

This graph shows reasonably well what has been happening here, and this outsourcing may well help us understand how such a dynamic expansion has been possible in the export sector at the same time as the relative value of German wages (in comparison with other EU states) has been falling.

One example of the implications of all of this is to be found in the news today that Spain is now to pay a 2,500 euro premium for every new child (whether born to the parent or adopted internationally). The impact of such payments on long term fertility is, of course, unclear, but the central point is that - thanks to all the immigration in recent years - Spanish finances are in a position to permit such expenditure increases.

Summing up: Germany is indeed undergoing something of an economic miracle, but sometimes miracles alone just aren’t enough.

That would also be the sector that defined economic history since the 18th C; the UK, then Germany, then the US, and now…?

“There are more things, sir, in heaven and earth than are dreamt of in your philosophy..”

“I’m still not seeing how a stagnant or decreasing work age population *automatically* translates into decreased per capita income.”

Maybe I’m being a pedant here Doug, but I sometimes feel I am having to argue on shifting sand. I mean where exactly do I talk about per capita income in this comments thread, and much more to the point, where do I use that little phrase *automatically*? I don’t recall saying this, nor would I agree with anyone who said it.

What I have said is that Germany has become structurally dependent on exports, and this fact seems to be related to Germany’s median age. Per capita living standards can rise or fall, depending.

What we can say is that it is a lot easier for a society to raise per capita incomes when the workforce constitutes a rising share of the total population (the demographic dividend period) than when it constitutes a declining share (the demographic penalty period).

The only think which can offset the downward path of per capita incomes, is, as everyone recognizes, productivity. I would say the jury is still out on whether productivity can be maintained as populations age.

But the important point here is the structural dependence on exports, and more to the point on GROWTH in exports to get growth in total GDP. This means that the whole economy becomes unduly dependent on one sector, and that it becomes increasingly difficult to maintain the dynamic.

And the economy needs to grow to maintain the living standards of the rising dependent population.

“Arguably Germany is indeed forced to run a current account surplus. Since Germany has no problem doing so, this doesn’t seem like a major issue. The world loves to buy German”

Yes, but the problem isn’t quite adequately specified putting things this way. The issue is that for the German economy to grow exports need to GROW, and keep growing, at a certain given rate ‘x’% pa which still needs to be specified, if Germany is to find a sustainable path.

In the present global expansion this isn’t proving TOO difficult (although what Germany and Japan are doing here are really quite remarkable achievements, it needs to be said. Cycling uphill is never easy).

Let’s have a look at what this means. Exhibit 1 is this chart which shows the rates of German export growth 1995 - 2006. Now what can be seen at first glance is that Germany has recently been sustaining very high rates of growth in exports, 16.6% in 2006 for example, and 9.1% in 2005. What is also interesting to note is that back in 2000 German exports grew at a rate of 21%, while in 2001 exports only rose by 0.8%, and guess what, Germany then dropped off into recession.
Now Claus kindy prepared this graph for me, (lets call it exhibit 2), and it tracks German GDP growth and German export growth, and I think it is clear that the two things are pretty closely connected, which leaves us with the big question, what happens to Germany (and Japan) when the present wave of global growth subsides?

“Obviously exports can’t grow forever. But they can stabilize at a very high level for long periods of time.”

Well this is the point, so what happens at the point when they can’t. No-one seems to be talking about this.

“Um. Eastern Europe — here defined as the EU-8 — absorbs less than 10% of German exports.”

I think we are back here to the point that this is all about GROWTH, and it just happens that the EU 8 are accounting for a very significant proportion of the additional export growth which Germany has been getting.

I recomend reading this (pdf) paper by some IMF economists (and which seems to be the most authoritative piece of work to date on the German export phenomenon), since I got the data from them.

Now if we look at this chart (exhibit 3), we will see that over the period from 1995 - 2005 exports to the EU8 grew at an annual rate of 12.5%, and that these countries, as you suggest, account for 8.6% (on average) of total exports. Now this is a decade long average, but it is clear that the share of export growth is weighted especially towards recent years.

Another way of looking at this is to compare the EU8 share, with the China share, which was only 2.7% of total exports over the period.

If you still doubt the importance of this phenomenon you could try looking at this chart (exhibit 4) which shows the top twenty sources of German imports and destinations for exports in 2006, and contains I think some surprises. Like, for example, the fact that exports to the Czech Republic alone were not that far short of exports to China despite the huge difference in the relative sizes of the countries. Exports to Poland were in fact greater than exports to China.

Some indication of the scale of importance of Eastern Europe can be found from the latest edition of the BIS quarterly review (summarised here by Bloomberg), which informs us that:

“Investment and lending have boomed in eastern Europe, pushing up wages and spurring consumer spending, as eight nations joined the European Union in 2004 and a further two followed this year. More than 60 percent of new credit to emerging markets went to European countries in the last three months of 2006, the BIS said today in a quarterly report.”

This credit share is enormous, and gives us an idea of the magnitude of the phenomenon we are dealing with.

OK, finally this question:

“Germany is like Latvia on the back-burner, at some stage they are going to run out of sufficient suitable labour to fuel the export growth.” — Why?

The biggest part of the explanation is that the version of the German unemployment story you are reading in the press is quite simply spin. Of course, unemployment in Germany is falling because new jobs are being created, but it is also falling because older people are leaving the labour force, and this latter component seems to be gaining in strength.

If we look at the latest employment statement from the German Statistics Office we find “The adjusted number of people out of work fell 37,000 to 3.82 million.” (June), But if we look at the latest employment creation data (May) we find that there were a total of 14,000 new jobs created, so that the number of people leaving seems to be the bigger share.

Here is the chart with the latest employment data (exhibit 5). Basically there are now 3.69 million people in Germany looking for work. This number is down by 1.5 million from the peak of unemployment in 2005. Obviously you need to think about trend and cycle here, but (without doing the calculations at this point) you need to ask with people leaving the labour force at the present rate just how long will it take to get below 2 million, and then 1 million, and then where do you go. No-one seems to be thinking about this at all, and yet we find a similar situation developing in Japan, and in Italy.