Managing Housing Sector Boom-Bust Cycles
| Author | Roberto Cardarelli, Deniz Igan, and Alessandro Rebucci |
| Position | IMF Research Department |
| Pages | 62-63 |
Page 62
After several years of rapid price increases, the housing markets are turning down in several advanced economies, according to new IMF research.
Published in an analytic chapter of the April 2008 World Economic Outlook, entitled "The Changing Housing Cycle and Its Implications for Monetary Policy," the research shows that house price growth has decelerated in many countries.
In a few countries-the United States and Ireland-house prices have fallen during the past year (see Chart 1). Real residential investment has also slowed in several countries, particularly in the United States, Australia, and, especially, Ireland, where it has fallen by about 3 percentage points of GDP since its peak four years ago.
Although few people would disagree that such developments may have important implications for the level of economic activity, considerable uncertainty still exists about the link between the housing sector and the business cycle. In particular, there are varying estimates, and analyses, of the extent to which house price fluctuations affect consumer spending and the dynamics of residential investment.
The uncertainty has been compounded by dramatic changes over the past two decades in how housing is financed in several advanced economies. These changes have entailed a shift toward a more competitive housing finance model. The new model has made it easier for households to access housing-related credit through diverse funding sources, lender types, and loan products, contributing to the rapid growth of mortgage debt in a number of countries.
Moreover, the prospect of a sharp boom-bust cycle in the housing sector in several advanced economies has reignited the debate on how monetary policy, which seeks to influence inflation outcomes by raising or lowering interest rates, should respond to developments in the housing sector.
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Chart 1 Steep declines
[ SEE THE GRAPHIC AT THE ATTACHED ]
In our study, we investigate whether the changes in the systems of housing finance over the past two decades have altered the links between the housing sector and economic activity. We also explore the implications of housing sector developments for the conduct of monetary policy. In particular, we aim to answer two questions:
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