Global Housing Price Boom and its Aftermath, The

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

There has been a similar housing price acceleration in many emerging economies. For instance, in most economies of Central and Eastern Europe housing prices were stable during the 1990s. But since the early 2000s, many of these countries have experienced double-digit annual growth rates of real housing prices. In contrast, housing price increases have been less significant among East and Southeast Asian economies where real housing prices remain below their level prior to the 1997 financial crisis.4 In major cities of emerging economies like China, India, Russia and Brazil, housing prices are also rising rapidly since 2000 while national mortgage markets remain of limited depth.

In the US, the rare housing price series compiled over the very long period 1890-2005 by Robert Shiller [2006] shows how exceptional the 1996-2006 housing boom has been in duration and amplitude by historical standards. Using the S&P/Case-Shiller national index, which is the best gauge of American house prices, US prices peaked in 2006 after rising by 134% in one decade. What is equally striking is that the US boom appears modest among OECD countries and is at the lower end of the price range in Figures 1 and 2. As another caution about the current quality of comparative housing market data, the Case-Shiller index suggests that the BIS data could be underestimating the overall magnitude of global house price gains.

What has been driving these synchronized national housing booms?

The national housing booms of 1995-2006 reflect the confluence of a number of factors: rising housing demand driven by income gains and demographic changes, historically low nominal and real interest rates; growing lender competition that became intense in the most developed financial markets; innovations in mortgage loan designs as well as in the delivery of these new mortgage products; and, most of all, by an abundance of capital from bank lenders and mortgage security investors. Expectations of rising housing prices on the demand side combined with expectations of lower risks on the lending side to fuel these powerful booms as is always the case in a housing boom. Then a mistimed financial stimulus can turn a boom that could be ready to unwind into a costly bubble, as happened in the US, see below.5

This global housing boom is an important outcome of the profound transformation of the global economy that started in the early 1980s with financial liberalization and new macroeconomic policies. Besides wars and reconstruction periods, economists now highlight three major periods in the global economic history of the 20th Century: the Great Depression of the 1930s, the Great Inflation of the 1970s, which gave way to the Great Moderation of the past two decades marked by declining GDP volatility and low and steady inflation. (Borio, 2006)

The benign economic environment of the past two decades results from deep interactions among megatrends that have fundamentally altered the structure of the global economy: rapid financial liberalization; the information technology revolution; a very high rate of financial innovation; trade liberalization and a rapid growth of global trade supported by major transportation innovations that have sharply lowered the costs of shipping goods and personal travel.