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).

Click to enlarge

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.

References

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

See www.oecd.org/eco/structural/housing

©OECD Observer No 286 Q3 2011




Economic data

GDP growth: +0.6% Q2 2018 year-on-year
Consumer price inflation: 2.9% Aug 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.3% Aug 2018
Last update: 10 Oct 2018

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Watch the webcast of the final press conference of the OECD annual ministerial meeting 2018.
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2018