However, the fall in home equity combined with a pro-cyclical tightening of refinancing standards and fees means that many borrowers who would like to refinance cannot do so. Problems in housing By many measures – including affordability ratios and price-to-rent ratios – home prices have fallen back to or below their pre-boom levels. Indeed, housing no longer appears overvalued. In many former boom localities, the price of existing homes has fallen below the cost of building a new home.6 Also, after several years of depressed construction the national stock of housing no longer looks excessive relative to the nation’s population. Nevertheless, housing currently remains in excess supply, in part, because household formation rates remain depressed. Normally, when there is excess supply, markets self-correct fairly efficiently. Prices fall until they reach a level at which supply and demand are balanced. Unfortunately, the housing market has a number of specific features that complicate this adjustment process and mean it could undershoot – and remain weaker for longer than is necessary. Housing is a very long-lived asset. Once new building ceases in stressed markets, further reductions in demand cannot be matched by further supply reductions.7 This means that the market clearing price for housing is highly sensitive to those factors that influence demand. Moreover, there is a feedback loop from prices to demand, with weaker prices leading to weaker demand. If house prices are anticipated to increase, then the expected capital gain helps to offset the financing cost of owning a home.
For instance, when I look at the negative growth of the last quarter – minus 1.2 per cent in France – one comforting aspect was that three-quarters of the decline was due to a reduction in  4  BIS Review 29/2009  inventories. So that was of course much better for the future because it means that once the inventories are back to the required level, to the level that corporates want to have, production starts up. So it is difficult to comment without seeing all the explanations. For the time being I have the feeling that our situation will be relatively, slightly better than that of some of our neighbour countries. What was one of our weaknesses in the past – that is a strong reliance on domestic demand and domestic consumption for growth, and certain weakness in net exports – has become a strength in the downturn. Exports have fallen, like in Germany, but their weight in GDP is much lower, so that it has hit the economy less. The consumer spending trend has remained positive. Compared to countries like Spain or the UK the average indebtedness of households was lower, so that the effect of the turmoil on consumer spending has been also relatively lower than in other countries. For all these reasons we felt that we had some slightly better resilience, but we must remain prudent. FT: Should Germany do more in terms of fiscal stimulus? CN: I think that they have decided on a second package that is sizable.