“The increase in house prices in many countries since the late 1990s has exceeded what would have been expected on the basis of changes in underlying fundamentals, such as household income and interest rates. This suggests that house prices in these countries are overvalued, increasing the possibility of a price correction.
In the United States, house price appreciation during the current cycle has been strong by historical standards.There has, however, been considerable differentiation across regions, with house price appreciation being most rapid in the west and northeast of the country, whereas prices in the south and midwest have lagged.
With the housing market cooling—most indicators of housing activity are weakening—the key question is how U.S. growth will be affected, given that consumption and residential investment, both affected by rising housing prices, have been key drivers of the strong economy in recent years.Previous housing market cycles in the United States have been associated with vastly different economic outcomes. In the 1979 cycle, real house prices fell, and consumption, residential investment, and GDP growth all slumped. Of course, economic conditions then were very different from those today: real interest rates were very high, as was the unemployment rate. The 1987 housing cycle was associated with a limited growth impact, and the IMF forecasts that the current housing cycle will do the same for 2007 growth. But there are downside risks. First, the slowing in house price appreciation could be more pronounced than expected—a drop in prices cannot be ruled out. Second, the wealth effects of slower house price growth on consumption may now be larger than in the past because of the greater exposure of households to asset price movements.
The Slowdown in Global Housing Markets(IMF)
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