I’m still too depressed to write meaningfully about the European Union, so I’ll just find solace in announcing gloom and doom for all via the housing market. Just blame it on the fact that I am just a few years too young to have been able to buy my first house (well, in Paris, apartment ) in the mid-to-late-90s when it was dirt cheap, and now it is too late and I see my older friends sitting on top of extravagantly valuable homes… (yeah, you know who you are).

Anyway, it’s not just me, it’s also the IMF, the Economist  and the US administration, not to mention Bubbles Greenspan himself.


First, the news:

According to the most recent official statistics (warning, 75p pdf) of the OFHEO, housing prices increased by 12.5% between the 1st quarter of 2004 and the first quarter of 2005, the second largest one year increase in 25 years (the first one was in Q3 2004). And it is by no means equally spread around the country:

Some regions are distinctly bubbly, like California, Arizona of the wider DC area, as acknowledged by Bubbles Greenspan himself:

Mr Greenspan stressed the large and diversified nature of the US housing market as making a national bubble unlikely, although there was “froth” in the market. An increase in second houses – as vacation homes or investment properties – might be a sign of speculative excess.

The growth of interest-only mortgages and other exotic deals suggested people were having difficulty affording houses and that the market would soon “simmer down”, he said.

This comes in the year that follows the data in the graph from The Economist posted above the fold (from this September 2004 article), and it comes more than 2 years after that warning from the IMW in their World Economic Outlook 2003 (30 page pdf), where they were writing about the aftermath of the dotcom bubble:

Another important difference is that housing prices in a number of countries have continued to increase throughout the equity price bust, in many cases by more than the threshold for a housing price boom. This is a particular concern since housing booms have been followed by busts about 40 percent of the time, and have been associated with larger output losses.

So why am I talking about good news??

  • well, the first one is in the sentence above: housing booms are followed in only 40% of cases by a bust (defined as the upper quartile of historical declines in housing prices);
  • the second bit of good news is that a housing “bust” means that the contraction has to exceed 14% (an equity fall of 37% is required historically to qualify for a “bust”, according to the IMF). It should nevertheless be noted that the average housing “bust” in industrial countries since 1970 reached 30% in real prices, and lasted 4 years from peak to trough, and that we currently have little inflation;
  • finally, the last piece of good news is that the situation is probably a lot worse in a number of other countries, especially Australia, the UK and Spain (a list which looks suspiciously like the initial coalition of the willing. Ironic isn’t it?):

Do don’t worry, the rest of the English-speaking world is fucked as well, and Europe is not far behind…

Finally, this table shows that there are ways to support GDP growth after a housing bust:

  • increased budget spending (and deficits)
  • increased exports

Two fine instruments naturally available to US policy makers today.