Economics in Latin America session at 12th International Conference

1. THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE
Kansas City, Missouri
September 25–28, 2014
Financial Fragility Applied to the Real Estate Sector: The
Case of Bogota Between 2003-2012
By:
GONZALO CÓMBITA MORA
FACULTY OF ECONOMICS AND SOCIAL SCIENCES
UNIVERSIDAD DE LA SALLE
BOGOTÁ, COLOMBIA

2. CONTENTS
1) Introduction
2) Backgrounds
3) Theoretical
framework
4) Empirical evidence
5) Conclusions
Bogota’s skyscraper new project the BD-BACATA

3. 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

4. 2. Backgrounds
• Mainstream’s point of
view:
a. Exuberance of the
fundamentals
b. Decisions are taken by
rational agents
c. 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

5. 3. THEORETHICAL FRAMEWORK
• Mainstream’s
perspective:
a. Isolating market and
individuals
b. Rational agents and
optimal behavior
c. Money does no count
and Pure exchange (r)
d. Bubble is not possible
e. Fundamentals are
based on micro
decisions
Y

 
d H
H F Y , r , ,
P
Y

r H
P
r P
H
H
H
d
( )
;
( )
*
*
( ) ( ) ( ) ( )
*












   

6. 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)

7. 4. Empirical data
4.1 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

8. 4.1 Descriptive analysis: sectoral
balance
• Deficit zero
• External and private
deficit
• Causes?
• Consequences: two
fragilities
5
4
3
2
1
0
-1
-2
-3
-4
-5
20002001200220032004200520062007200820092010201120122013
(G-T)/Y (X-M)/Y (S-I)/Y

9. 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 )
4.9
4.8
4.7
4.6
4.5
4.4
4.3
4.2
4.1
4
8.2
8
7.8
7.6
7.4
7.2
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
lnR
LnE
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
Portafolio
FDI

10. 1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
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
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
FDI outflow of foreign earnings

11. 10,000
5,000
0
-5,000
-10,000
-15,000
-20,000
20002001200220032004200520062007200820092010201120122013
Goods and services Net factor income Net transfers
14
12
10
8
6
4
2
0
-2
-4
Agriculture Mining Manufacture Real state
sector
Whole
economy
o1-o4
o5-o8
o9-13
• Current account deficit:
Net factor income and
goods and services.
• Sectorial Growth
performance: Winners
and losers.

12. 5.50
5.30
5.10
4.90
4.70
4.50
4.30
4.10
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-I
LnTI
LnIPVN
5.6
5.4
5.2
5
4.8
4.6
4.4
4.2
4
10
9
8
7
6
5
4
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-I
lnNetinflow
LnIPVN
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

13. A. 2 Private sector
 Increasing indebtedness
 Credit elasticity
 Fiscal and monetary
policy: interest rate,
spending
 Speculation: real state
market

14. Private Indebtedness:
• Loan portfolio:
consumption-
Mortgages
• External debt:
banking sector
100,000.0
80,000.0
60,000.0
40,000.0
20,000.0
-
Loan portafolio
Mortgages Consumtion
52000
47000
42000
37000
32000
27000
22000
17000
12000
Private debt
Public debt

15. 6
5.5
5
4.5
4
3.5
3
14.5
14
13.5
13
12.5
12
11.5
11
2000-I
2000-IV
2001-III
2002-II
2003-I
2003-IV
2004-III
2005-II
2006-I
2006-IV
2007-III
2008-II
2009-I
2009-IV
2010-III
2011-II
2012-I
2012-IV
2013-III
ln housing credit LnIPVN
 Increase in credit´s elasticity
 Increase in correlation
between credit
consumption and
mortgages: >5 years

16. • Public policies:
 Government spending
 Rate of interest
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
7.5
7.3
7.1
6.9
6.7
6.5
6.3
6.1
5.9
5.7
200218
200347
200435
200515
200607
200639
200719
200751
200831
200910
200942
201022
201102
201136
201216
201248
201328
201407
5.5
5
4.5
4
3.5
3
2.5
2
Hipot $
Tasa $ Subsidiada
Hipot UVR
Tasa UVR Subsidiada
5.5
2,0002,0012,0022,0032,0042,0052,0062,0072,0082,009
LNSRSS
LnIPVN

17. 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.