IMF Warns Of Global Housing Bubble 2.0 – OpEd


By David Kerans

In mid-2004 or mid-2005 The Economist magazine ran a special report declaring housing prices globally to be the biggest bubble in the history of all bubbles. The crash in housing prices was responsible for the global financial crisis that broke in 2008, of course, and the governments around the developed world took a close look at how to correct the damage and prevent a recurrence.

They did not manage to correct all the damage, of course. Governments have piled up a lot more debt on themselves, but economic growth has been elusive in Europe and North America for the last few years. And now it seems we may have another global housing bubble. Min Zhu, the IMF’s deputy managing director, said in a speech to the Bundesbank that accelerating global house prices are a significant threat to economic stability, and require government action.

How high are the prices? The IMF’s Global Housing Index shows prices up 3.1% over the last year, and the Index now rests 23% above the level of year 2000, which of course was a good year already, what with the stock bubble fueling extraordinary optimism until late in that year.

In Canada, to give the starkest example, sales prices for homes are “33% above their long-run average in relation to incomes (and 87% above the historical norm relative to rents).

We should point out immediately that the US, Germany, and Japan are not among the obviously overpriced markets. In the US, in fact, home prices are 13% below the historical norm versus incomes, and a modest 2.6% above historical rental prices.

Why are prices rising so fast? Surely because central bankers have kept interest rates so low for so long. And interest rates are going lower: the ECB just cut its deposit rate to -0.15%.

So, what is to be done? In his speech to the Bundesbank Mr. Zhu recommended immediate imposition of tighter lending requirements to homebuyers, higher capital requirements on mortgage lenders, and measures to keep foreign investors out of inflated markets.

For discussion of the meaning of the global housing bubble to the US, Radio VR’s David Kerans spoke with Ken Fears, Director of Housing, Finance, and Regional Economics for the National Association of Realtors (NAR).

Fears said that recent rises in home prices in the US would force prospective homebuyers to temper their expectations, and that prices stand to keep rising in most categories, especially for entry-level homebuyers, for whom the inventory of available properties continues to be tight, on account of slack construction of new housing units since 2008.

As regards the structural distortion of home prices in the US connected to the weak school system? Fears agreed that the quality of school districts is a primary determinant of home prices, as is the convenience of commuting to major centers of employment. Those two factor while continue to buoy housing prices.

As far as the GSEs (Government Sponsored Entities) Fannie Mae and Freddie Mac are concerned, Fears did not offer an official NAR position in response to pressure in Congress to disband them, confining himself to the NAR’s preference for predictable, steady flows of credit into the mortgage sector. He did, however, rebut the thesis of GSE opponents to the effect that the so-called “jumbo” mortgage market, in which Fannie and Freddie do not operate, functions just fine. Fears pointed out that the jumbo market has not been functioning well, that credit availability has been poor there.

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