(Quarterly report on the euro area. 4. December 2012.
Brussels. PDF. Free.)
In view of the central role that overheating housing markets played in previous years in a number of euro area Member States, the latest Quarterly Report on the Euro Area presents an analytical toolkit for assessing housing market imbalances. It is centred around an analysis of cyclical overvaluation of house prices based on a filtering approach. This notably allows unsustainable developments such as pronounced boom and bust phases to be distinguished from milder cyclical movements, and enables euro area Member States to be grouped into different categories of housing market overvaluation. This filter-based analysis is complemented with alternative valuation methods for house prices, such as affordability metrics and fundamentals-based estimates, so as to establish a comprehensive and multi-layered approach to understanding house price dynamics.
Other chapters of the Quarterly Report look at various issues related to fiscal policy. One contribution presents empirical evidence on the relationship between fiscal decentralisation and fiscal discipline. The analysis suggests that decentralisation can be beneficial for budgetary outcomes, and that it works best when subnational authorities are relatively self-reliant on own revenue sources. A further section explores the economic implications of various forms of housing taxation. Property tax revenue is generally small in relation to national output, indicating potential scope for shifting tax burdens away from labour and corporate income taxation and onto residential property holdings. Tax-deductibility of mortgage interest payments may also increase the risk of housing booms. A final contribution looks at sovereign bond spreads in the euro area, finding that the crisis has caused investors to generally demand a higher compensation for being exposed to a given level of public debt and contingent fiscal liabilities. The section further finds that a significant portion of credit spread increases remains unexplained by macroeconomic fundamentals, suggesting that general policy uncertainty, in particular regarding the integrity of the euro area, may explain some of the risk aversion. Consistent policies, leading to a reduction of the component of spreads that is driven by policy uncertainty, will have positive effects on growth.