U.S. Housing Slump Could Spread Overseas
Weakness in the U.S. housing market could trigger an international slide in home prices that depresses the sector for years, a top housing specialist warned central bankers Friday.
"The United States, as the premier example of a capitalist economy, has the potential to lead price expectations down in many countries," said Robert Shiller, in a paper presented at the Kansas City Federal Reserve's monetary policy conference in the mountain resort of Jackson Hole, Wyoming.
"It is not improbable that we will see such large real price declines extending over many years in major cities that have seen large increases," Shiller said.
Central bankers, economists and academics from around the world have gathered here to discuss the relationship between housing and monetary policy against a backdrop of global financial turmoil. Fears about contagion from troubles in the U.S. subprime mortgage market have hit credit availability and threaten to slow economic growth.
Shiller, a professor of economics and finance at Yale University, said the dramatic rise in house prices witnessed in a number of advanced economies created serious challenges, and it was very tough to predict what lay ahead.
"The implications of this boom and its possible reversal in coming years stands as a serious issue for economic policy-makers. It may be hard to understand from past experience what to expect next, since the magnitude of the boom is unprecedented," he said in prepared remarks, released to the media prior to delivery.
The decline in U.S. house prices picked up speed in the second quarter, falling 3.2 percent on the S&P/Case-Shiller national home price index after a 1.6 percent drop in the previous three months.
A big part of the problem for policy-makers was the role of psychology in driving up house prices, leading to a speculative bubble that was much more prone to a swift correction impacting a number of otherwise unconnected housing markets.
"Speculative markets are inherently unpredictable, and ... the incipient downturn in the United States could reverse and head back up," said Shiller.
He cited the experience of the London property market, where prices doubled between 1983 and 1988 and then went into free-fall, losing 47 percent by 1996.
However, prices there then took off again, pausing briefly in 2004 and 2005 before resuming an upward march that defeated forecasts and has defied explanation.
"The London case study should caution anyone who feels that a substantial decline in home prices in the United States is inevitable, given the recent declines, but not really offer much comfort for real estate optimists either, given the isolation, and special character, of the brief London downturn," he said.
In general, the historic performance of housing markets once they take a turn for the worst was pretty depressing.
"The examples we have of past cycles indicate that major declines in real home prices -- even 50 percent declines in some places -- are entirely possible going forward...such price declines have happened before," he said.