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Finance & Development
A quarterly magazine of the IMF
December 2006, Volume 43, Number 4

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The Slowdown in Global Housing Markets

Following a period of sharp price rises and strong activity, housing markets in a number of industrial countries have slowed. The Netherlands was the first country to experience a slowdown, with the downturn starting in 2000. Australia and the United Kingdom followed next. After annual house price increases exceeded 20 percent in 2002, the rate of house price appreciation in these countries has since eased considerably. And, over the past year, house price increases in the United States have slowed. Nevertheless, in other industrial countries, such as Ireland, France, Spain, and Sweden, house price growth remains strong.

Residential property prices in many industrial countries have slowed.

What has been the economic impact of recent housing market downturns? Cooling housing markets in Australia, the Netherlands, and the United Kingdom, among others, have been associated with a slowing in growth, as residential investment and consumption spending were hurt. But to date, the impact has been manageable.

The recent slowdown in housing prices has gone hand in hand with a slowdown in a number of industrial countries' economic growth.

The increase in house prices in many countries since the late 1990s has exceeded what would have been expected on the basis of changes in underlying fundamentals, such as household income and interest rates. This suggests that house prices in these countries are overvalued, increasing the possibility of a price correction.

For many, actual house price growth has exceeded projected prices, suggesting overvaluation.

Interestingly, house prices in the industrial countries move together despite the fact that housing is a nontradable asset. This correlation suggests there is a global house price cycle, driven at least partly by world interest rates. Thus, the downturns that have already occurred in a number of countries may be followed by slowdowns in other housing markets that are currently still seeing strong price increases.

A global house price cycle exists.

In the United States, house price appreciation during the current cycle has been strong by historical standards.

Compared with previous cycles, recent U.S. house price appreciation has been significantly stronger...

There has, however, been considerable differentiation across regions, with house price appreciation being most rapid in the west and northeast of the country, whereas prices in the south and midwest have lagged.

...although price growth has varied greatly across the country.

With the housing market cooling—most indicators of housing activity are weakening—the key question is how U.S. growth will be affected, given that consumption and residential investment, both affected by rising housing prices, have been key drivers of the strong economy in recent years.

Lower mortgage applications and more new homes for sale don't bode well for the housing market in the near term...

Previous housing market cycles in the United States have been associated with vastly different economic outcomes. In the 1979 cycle, real house prices fell, and consumption, residential investment, and GDP growth all slumped. Of course, economic conditions then were very different from those today: real interest rates were very high, as was the unemployment rate. The 1987 housing cycle was associated with a limited growth impact, and the IMF forecasts that the current housing cycle will do the same for 2007 growth. But there are downside risks. First, the slowing in house price appreciation could be more pronounced than expected—a drop in prices cannot be ruled out. Second, the wealth effects of slower house price growth on consumption may now be larger than in the past because of the greater exposure of households to asset price movements.

...but it is hoped that, as in 1987, the 2005 cycle will hurt growth only modestly.

The sources for all charts are national authorities and IMF staff estimates.

Prepared by Tim Callen, Marco Terrones, and Angela Espiritu of the IMF's Research Department.