House prices: Which way now?

Financial market failures were a major cause of the economic crisis, but property markets, particularly for housing, have had a leading part to play too. From the subprime debacle in the US to the bursting of unprecedented real estate bubbles in Ireland, Spain and Greece, among others, the overheating and collapse of property markets not only hurt savings and investments, but was felt throughout entire economies, affecting construction, employment, lending, spending and more.

Generally speaking, real house prices had started to peak in the vast majority of OECD countries prior to the financial crisis. But a striking development has been the rebound in real house prices in some (but not all) OECD countries since then. In Canada and Australia, for instance, as well as in Belgium, Finland, France, Norway, Sweden and Switzerland, prices have firmed up, in part thanks to substantial easing of monetary policies (with record low interest rates).

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Also, within countries, some prime city markets such as Paris and London have seen large rises in prices as investors fled less attractive property markets, and as stock markets became more volatile. However, developments have been far from positive elsewhere. Outside London, the UK market has barely seen any recovery at all, while in Denmark, Korea and New Zealand, property prices remain modest at best.

Meanwhile, the slide in real house prices continues unabated in Greece, Ireland, Italy, the Netherlands, Spain and the United States.

Germany and Japan are the outliers, as they are still working off their housing bubbles from the early 1990s. However, there are signs of bottoming out in Germany, while in Japan real house prices may finally trough in 2011 or 2012.

For policymakers, spotting such turning points in property markets is important and to help them, OECD economists use what are called probit models, which compute the probability of peaks and troughs. The predictions are based on developments in basic indicators such as interest rates, the supply of new housing and the business cycle, not to mention the pace of house price changes observed in recent quarters.

These probit exercises sketch a rather bleak near-term future for real house prices generally. For the countries where real house prices have seen an upswing, peaks are predicted to occur before the end of 2012. This does not necessarily point to a “bubble” in these countries, but it does spell a likely turning point.

Property markets in most of the countries where house prices have been falling–Denmark, Italy, Korea, the Netherlands, New Zealand and the UK–will remain volatile. However, the US, Greece, Ireland and Spain could see troughs in 2011 or 2012, though for the latter three this assumes a resolution is found to the current sovereign debt crisis, resulting in a narrowing of interest rate spreads with Germany.

As with any market, making predictions about house prices is always surrounded by uncertainty. There may be estimation errors and problems with the variables chosen in the model. Even so, it seems likely that most countries now showing upswings in real house prices will see their housing cycle turn downwards in 2012, while declining property markets in most countries that are currently experiencing downturns are not expected to bottom out.


Rousová, L. and P. van den Noord (2011), “Predicting Peaks and Troughs in Real House Prices”, OECD Economics Department Working Papers, No 882, Paris.


©OECD Observer No 286 Q3 2011

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