House proud

The global economic crisis was accompanied by a collapse in house prices in most rich (and some not-so-rich) countries around the world. The IMF has compared house prices in the first quarter of this year with their level a year ago in 52 rich and emerging housing markets. It found a median house-price decline of 7%. The figures drive home just how savage the falls in house prices have been in many countries.

America’s housing bust may be close to the global average but the declines in some countries are mind-boggling. Latvia, with a wrecked economy propped up by emergency IMF funding, saw an annual decline in house prices of nearly 60% to the end of the first quarter. During that period Estonia and the United Arab Emirates also saw collapses of nearly 40%. In Britain they fell around 20%.
All of this prompts the question of how much further prices have to fall. Are the slight rises of recent months a sign of broader recovery, or blips on the way to further pain. The IMF’s analysis of past housing cycles provides some clues. On average house prices in rich countries rise for around six years by around 50%, before falling for five years by 24%. But this time around, the boom was twice as long and prices rose by more than twice as much as during past upturns. The IMF argues that although house prices have already fallen by 20%-close to the historical average–“there could still be significant corrections to come”. This conclusion will not please those hoping for a sharp recovery.

Of course, there will be plenty of variation across countries. The IMF has tried to see how much of the increase in house prices in various countries over the past decade cannot be explained by increases in disposable incomes, the working-age population, credit, equity prices, interest rates and construction costs. The results suggest that house prices still have some way to fall before they hit bottom in Ireland, Italy, and Britain. But the bleeding may nearly over in America, Germany, and South Korea.

The Economist