International Monetary Fund

Search
Please send us your feedback

IMFSurvey Magazine: What the numbers show

Subscribe Share This
Will House Prices Keep Falling?

Houses in County Cork, Ireland, where house prices have dropped by almost 15 percent in the past year (photo: Newscom)

Global House Price Monitor

Will House Prices Keep Falling?

By Prakash Loungani
IMF Research Department

January 12, 2012

  • Global housing downturn that began in 2007 continues
  • But price movements differ significantly across countries
  • In most countries, house prices expected to fall further

Globally, house prices remain in the doldrums. After a decade of boom, the global house price index peaked in the fourth quarter of 2007 and since then has fallen or remained flat, according to IMF research (see Chart 1).

Looking behind the global index, however, reveals large differences across countries. It’s not quite the 99 percent versus the 1 percent picture, but more like 50-50: house prices have fallen over the past year in about half the countries and risen in the other half (see Chart 2).

More room to fall?

Many factors drive house prices (see Housing Prices: More Room to Fall? and IMF Research Bulletin: Seven questions about house price cycles) making it difficult to predict their future course. Two indicators that economists use to predict the direction of change in house prices are the ratio of house prices to income and the ratio of house prices to rents. If these two ratios are above their historical averages, economic theory suggests that declines in house prices may still be in the offing.

How do these indicators look with the latest data on house prices? For all but a handful of countries, these ratios remain above, and in many cases well above, their historical averages, signaling that there may be room to fall (see Chart 3).

Driving factors

An econometric model of the determinants of house prices, used in the IMF’s World Economic Outlook (see House Prices: Corrections and Consequences, and updated here and here ), paints a somewhat different picture.

The model explains house price growth based on several short-run factors, such as growth in incomes, asset prices, and population, and long-run factors, such as the ratio of house prices to incomes. The difference between house prices and those predicted on the basis of these fundamental factors gives an indication of whether there is room to fall.

The results from this exercise show that in many countries the declines in house prices over the past five years (the ‘actual’) are close to, or even exceed, what was predicted by the model. But for many countries, house prices are still resisting the predictions of the model (see Chart 4).

‘This Country is Different’

The indicators presented above are very broad brush. At any time, there are a myriad country-specific factors that influence house prices. IMF staff reports for countries often delve into these factors in much more detail. Readers interested in developments in house prices in particular countries would be well served by consulting these documents. Links to some recent reports that have featured house price developments are given below.

Country Link to Report Pages Date

Australia

Staff Report, Article IV

8

Oct-11

Canada

Staff Report, Article IV

30, 36

Dec-10

Canada

Selected Issues Paper, Article IV

3 to 16

Dec-10

China

Staff Report, Article IV

9 to 10

Jul-11

Denmark

Staff Report, Article IV

3, 9

Dec-10

France

Staff Report, Article IV

24 to 26, 30

Jul-11

Korea

Staff Report, Article IV

7, 25

Aug-11

Netherlands

Staff Report, Article IV

1, 18, 27,

Jun-11

Netherlands

Selected Issues Paper, Article IV

47 to 55

Jun-11

Spain

Staff Report, Article IV

9,

Jul-11

Spain

Selected Issues Paper, Article IV

8 to 9

Jul-11

Sweden

Staff Report, Article IV

9 to 10

Jul-11

Switzerland

Staff Report, Article IV

8

May-11

United Kingdom

Staff Report, Article IV

8, 10, 30

Aug-11

United States

Staff Report, Article IV

19 to 22, 47

Jul-11

United States

Selected Issues Paper, Article IV

4 to 13

Jul-11