> [this is from the WSJ.com nightly roundup]
>
> U.S. Metro Areas See Record Housing Boom
>
> Speaking of interest rates, the Fed's (previously) super-low rates
> have helped fuel a housing boom, according a new government study.
> More U.S. housing markets are booming than at any time in at least 30
> years, according to Federal Deposit Insurance Corp. analysis of
> government housing data. Although that may not mean a wave of
> bad-news "busts" is on the way, the risks could be high. Of 362 U.S.
> metropolitan areas, about 15% are in the middle of a housing "boom,"
> defined as a three-year, inflation-adjusted price gain of 30% or
> more, the study said. Among the 55 booming locales are several
> red-hot markets in California, Florida and New York, along with Las
> Vegas, Boston and Washington, D.C. The FDIC said the percentage of
> boom markets was the highest ever in the 30 years Uncle Sam has been
> keeping track.
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(Also this, in the Financial Times last week...)
Property could fall like a house of cards By Edward Chancellor Financial Times April 26 2005
British and American policymakers appear to regard the recent period of house price inflation in their countries with equanimity. As long as neither inflation nor unemployment soars suddenly, we are told, the current level of house prices is sustainable and economic growth is not threatened.
But not all central bankers are so insouciant. Nout Wellink, president of the Dutch central bank, last month warned that a hangover from the property boom could well exacerbate the next downturn. Both the Dutch experience and the history of housing booms suggest that this counsel deserves to be taken seriously. However, it is probably already too late for the leading Anglo-Saxon economies to escape lightly from the consequences of their property bubbles.
In the late 1990s, the Netherlands had one of the most successful economies in Europe. At the time, both Dutch house prices and household credit growth were rising at double-digit rates. As homeowners cashed in on their burgeoning home equity, the Dutch savings ratio collapsed (from more than 13 per cent of income in 1997 to less than 7 per cent three years later).
The Dutch housing market cooled after interest rates began climbing in 1999. The following year, house-price inflation came to a halt. Household credit growth slowed simultaneously - mortgage equity withdrawal fell from €10bn ($13bn) in 1999 to €5bn in 2002. This had an adverse effect on consumption. As consumer confidence dipped and unemployment climbed, the Dutch began to save more. Three years after the end of the housing boom, the economy contracted.
The end of housing bubbles in other countries has been associated with periods of prolonged economic weakness, increasing financial fragility, rising government deficits and the appearance of monetary instability.
Contrary to popular perception it is not necessary for house prices to fall to create a serious problem for the economy at large. When house prices merely cease rising, the rate of credit growth normally slows, inducing householders to save more and spend less. At best, this produces a mild drag on the economy, as has been the case in the Netherlands. At worst, the economy undergoes a severe slowdown with soaring unemployment and a painful recession - as occurred in Japan, the UK and Scandinavia in the early 1990s.
But it is not just borrowers who are hurt by a housing market collapse. Rising levels of bad debt inflict damage on lenders' balance sheets. This often leads to a credit crunch and sometimes to a full-blown banking crisis. The failure of the Bank of United States in 1930, for instance, during the Great Depression, was due largely to losses on property lending. Furthermore, as over-indebted households cling tenaciously to their homes and lenders delay the politically unpopular and costly process of foreclosure, the banking system may have to deal with the aftermath of a housing crash for many years.
Government finances commonly deteriorate after housing booms end, as fiscal policy is employed aggressively to prevent the economy from slumping further. Since the end of the property bubble in the early 1990s, Japanese government debt as a percentage of gross domestic product has more than doubled and currently exceeds 160 per cent of national income.
Over-indebtedness born of the housing boom may also contribute to deflationary pressures during the bust. When household balance sheets are damaged by falling house prices and confidence is low, consumers may start repaying their debts regardless of the cost of borrowing. When this happens, monetary policy loses its power to stimulate the economy and prices tend to fall. The "liquidity trap", first identified by John Maynard Keynes in the 1930s, reappeared in Japan during the 1990s.
The boom does not have to end in deflation. As the main problem of the housing boom is a legacy of over-indebtedness, the authorities may induce inflation to diminish the real value of outstanding household debt. Soaring inflation mitigated the aftermath of the UK housing boom in the mid-1970s.
The head of the Dutch central bank now regrets what he calls the "artificial stimulus" provided to the economy by the housing boom. With the housing markets in the UK and the US vulnerable to rising interest rates, officials at the Federal Reserve and the Bank of England may shortly be forced to learn the same painful lesson.
The writer, a financial historian and former investment banker, is author of the recent report Crunch-Time for Credit? (Harriman House)