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How housing slumps end

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  • Agustín S. Bénétrix
  • Barry Eichengreen
  • Kevin H. O'Rourke

Abstract

We construct a simple probit model of the determinants of real house price slump endings. We find that the probability of a house price slump ending is higher, the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline; the lower are real mortgage interest rates; and the higher is GDP growth. Slumps are longer, other things being equal, where housing supply is more elastic, but shorter the more developed are financial institutions. For slumps of a given size, shorter sharper slumps are associated with worse macroeconomic performance in the short run, but with better performance in the long run. This suggests that for sufficiently low discount rates, policy makers should not impede the decline in real house prices, and this conclusion is reinforced by the finding that after a certain duration, house price slumps can become self reinforcing. On the other hand, we also find evidence that during downturns, falling house prices can lead to lower private sector credit flows. Policy makers thus face a delicate balancing act. While they should not intervene to artificially prop up overvalued house prices, they should ensure that their macroeconomic and banking policies are such as to make a bottoming-out more likely. This suggests that they should keep real interest rates low, and ensure that banks are well-capitalised.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 27 (2012)
Issue (Month): 72 (October)
Pages: 647-692

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Handle: RePEc:bla:ecpoli:v:27:y:2012:i:72:p:647-692

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Citations

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Cited by:
  1. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
  2. Philippe Bracke, 2011. "How Long Do Housing Cycles Last? a Duration Analysis for 19 OECD Countries," IMF Working Papers 11/231, International Monetary Fund.
  3. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
  4. Douglas Sutherland & Peter Hoeller, 2014. "Growth Policies and Macroeconomic Stability," OECD Economic Policy Papers 8, OECD Publishing.
  5. Duffy, David & Durkan, Joe & Casey, Eddie, 2012. "Quarterly Economic Commentary, Summer 2012," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20122.
  6. Duffy, David & FitzGerald, John, 2012. "The Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2012(2-Summer).
  7. Duffy, David & Durkan, Joe & O'Sullivan, Cormac, 2012. "Quarterly Economic Commentary, Winter 2011/Spring 2012," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20121.

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