House Prices Are Up: Should We Be Happy?

Economic Policy
Financial Economics


This article  was previously published in the IMF Blog - Insights and analysis on Economics and Finance, on May 16, 2019.

House prices around the world have recovered smartly since the 2008 global financial crisis. Depending on where you live, that may or may not be a good thing.

IMF research shows that there is a tight link between movements in house prices, on the one hand, and economic and financial stability, on the other.

In fact, more than half of the banking crises in recent decades were preceded by boom-bust cycles in house prices. So it’s no wonder that central bankers in Australia, Canada, Europe, and elsewhere have expressed concern about the potential for large declines.

The Chart of the Week shows average annual price changes in 32 advanced and emerging market economies and their major cities from 2013 through the second quarter of 2018. Dublin tops the gains among major cities in advanced economies, at 10 percent. Among cities in emerging market economies, Shanghai takes the prize, with an annual increase of almost 9 percent.

In recent years, house prices in major cities have moved in tandem, raising concern about the potential for large, coordinated declines. The increased synchronization of house prices is the subject of Chapter Three of the April 2018 Global Financial Stability Report.

Fortunately, IMF economists have developed a new tool to help policymakers predict the odds, or the magnitude, of a large decline in house prices. Their study, which is described in detail in Chapter Two of the April 2019 Global Financial Stability Report, identifies five factors that are associated with greater risk of a housing bust. These include rapid economic growth (in advanced economies), overvaluation of home prices, credit booms, and tighter financial conditions, which may include higher interest rates.

What steps can policymakers take to limit the downside risks to house prices and their consequences for the real economy? So-called macroprudential measures seem to be effective. Examples include regulations that limit the amount of a home loan relative to the property price, or the size of the monthly mortgage payment relative to income. With the right policies, it will be possible to improve the resilience of the housing market.

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