Global Housing Price Boom and its Aftermath, The

Housing Finance International, Dec 2007 by Renaud, Bertrand, Kim, Kyung-Hwan

The unprecedented global housing boom of 1995-2006 is now unwinding. It has affected almost all advanced economies and a very significant number of emerging economies. Housing prices have even accelerated during the period 2002-2006. What were the global structural factors that have been driving these synchronized national housing booms? How did the low interest rate era and the high rate of mortgage innovation induce significant behavorial changes among households and transformed mortgage markets? Why did these housing price booms differ between "global cities" and the others, and what has been the impact on the affordability of housing? In what way did poor regulation and supervision of US subprime lending innovations lead to a debacle? Why did US non-performing subprime loans trigger a much wider and deeper structured finance crisis? What are the prospects for the unwinding of this first global housing boom in different countries and for the global economy?

A historically unprecedented global housing boom is now unwinding. The financial crisis that has erupted in August 2007 marks the end of a major global credit cycle that has significantly benefited the growth of the housing sector and mortgage markets in most advanced OECD economies and in a large number of emerging economies as well. For several years, central bankers, bank regulators and economists monitoring global financial markets had worried about the widespread under-pricing of risk (BIS 2005 and 2006; IMF 2005). A financial crisis was seen as an accident waiting to happen somewhere in the global financial system. Opaque hedge funds were often mentioned. The actual trigger has been the US subprime mortgage market.

It is too early to tell in what manner and how soon global financial markets will recover their full stability. The dynamics of the US subprime market with its direct and indirect impacts on the performance of the US economy is also a distinct story of its own. Yet significant questions about this unwinding global housing boom can already be addressed: how strong has the global housing price boom been in different countries? What has been driving these synchronized housing booms? Why did rates of housing price increase vary across regions and cities of the countries experiencing these booms? How did these housing booms affect housing affordability for middle and low-income households? Will their unwinding seriously affect the economies of some of these countries, and the global economy?

The global housing boom of the decade 1995-2006

The global boom of 1995-2006 marks a new era for housing. Early analyses of the global boom by the Bank of International Settlements, IMF and OECD (BIS 2005 and 2006; IMF 2005; Girouard-OECD 2006) revealed increasingly correlated housing price increases among most - but not all - advanced economies that became very significant during the period 1995-2001. They also showed that housing prices in many countries accelerated further during 2002-2006.

Housing price indices vary in design, coverage and data quality across countries in advanced economies. In emerging markets they are often fragmentary. For the same market, there can also be several indices giving somewhat different readings as is the case in the US. Estimates of the growth of housing prices across OECD economies have also been made by analysts using different methodologies. As a result, rankings of countries in terms of housing price inflation vary for the countries in the middle range of price gains depending on methodology and choice of index. But most studies provide consistent results for the two extremes of the distribution of housing prices. At the bottom we find countries with no significant real price inflation such as Germany and Japan. At the top we find countries with extremely high real price growth such as Ireland, Spain and the UK.2 The BIS data used in Figure 1 suggest that for most countries, real housing price increases have ranged somewhere between 50% and 120% during this exceptional boom. (�gert and Mihaljek, 2007).

If we look at average annual rates of price increase, two other features of the boom emerge as shown in Figure 2.3 First, with most house price increases well above 50% in real terms their growth has been much faster than the growth in average real incomes of almost all countries. Indeed housing markets are now often clearing at real prices that are about twice as high as they were ten years ago. Notable exceptions to these strong housing price booms are: Germany due to slow growth and the real estate problems after reunification with East Germany; Japan and its "lost decade" in the aftermath of its massive bubble; Korea due the 1997 financial crisis; and, Switzerland because of its unusual market structure and low ownership rate of 34% (Bourassa and Hoesli, 2006). Second, there has been a significant housing price acceleration during the second half of the boom over the period 2002-2006, except in a few countries like Ireland where the annual rate of real house price inflation had already been exceptionally high over the period 1995-2001.