Archive for the ‘Housing’ Category

How Housing Slumps End

This is a joint paper with Barry Eichengreen and Kevin H. O’Rourke commissioned by Economic Policy. It will be presented in the Economic Policy Fifty-Fourth Panel Meeting in Warsaw.

Abstract: We construct a simple probit model of the determinants of real house price slump endings. We find that the probability of a house price slump ending is higher, the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline; the lower are real mortgage interest rates; and the higher is GDP growth. Slumps are longer, other things being equal, where housing supply is more elastic, but shorter the more developed are financial institutions. For slumps of a given size, shorter sharper slumps are associated with worse macroeconomic performance in the short run, but with better performance in the long run. This suggests that for sufficiently low discount rates, policy makers should not impede the decline in real house prices, and this conclusion is reinforced by the finding that after a certain duration, house price slumps can become self-reinforcing. On the other hand, we also find evidence that during downturns, falling house prices can lead to lower private sector credit flows. Policy makers thus face a delicate balancing act. While they should not intervene to artificially prop up overvalued house prices, they should ensure that their macroeconomic and banking policies are such as to make a bottoming-out more likely. This suggests that they should keep real interest rates low, and ensure that banks are well-capitalised.

You can download the paper from here, here or here.

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How housing slumps end

This is a VOXEU column together with Barry Eichengreen and Kevin H. O’Rourke.

Abstract: The world’s current economic problems started when housing bubbles burst in several advanced economies. Economic recovery without housing market recovery is unlikely to be sustained. This column presents new research on the probability of housing slumps ending. There is at least a one-in-eight chance of housing slumps in the three big economies (US, Japan and Germany) ending imminently, but there is nothing approaching the same probability elsewhere. If things turn out as projected here, we may be about to have a test of the locomotive theory – whether the big economies can pull along their smaller brethren – both for housing markets and generally.

This column can be found here.

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