The Global House Price Boom and its Unwinding: An Analysis and a Commentary

Abstract

The unprecedented rises in house prices across much of the industrialized world during the period 1997–2006 have been closely linked to the massive global credit expansion of the past decade. They have also coincided with the highest rates of growth of the global economy on record. The downturn of house prices in the US that began in late 2006 has been the trigger for the US sub-prime crisis, itself the catalyst for the broad financial crisis that began in August 2007 which by September 2008 had become the worst US financial crisis since 1929. As a result, the structure of the highly influential US mortgage finance system has already changed fundamentally. These US problems will lead to a thorough review of mortgage securitization processes and of the wholesale funding of mortgage finance across the world. However, housing markets and housing finance systems differ significantly between countries and will channel the shocks originating from the US with varying intensity. Given the interdependence of the global economy, the quality of the US policy response and its impact on the depth and duration of the US recession will influence house price downturns in all other countries. This paper, written in the midst of the US crisis, looks to our understanding of fundamental economic and financial relationships: first, to describe the key features of the house price boom; second, to examine the likely impacts of the unwinding of that boom; and, finally, to bring out implications for affordability, the provision of housing credit and the most appropriate forms of tenure for higher risk households.