The Housing Market and Residential Investment

The importance of the housing market and residential investment was highlighted by OECD (2000b), suggesting that ‘In the United States… the contribution of real estate developments to the current economic expansion has been emphasised recently’ (p. 169). In fact, it is argued that ‘Over the 1996–99 period, the growth of housing wealth in excess of income growth in the United States may have contributed 0.4 percentage point to the total drop of the household saving ratio of some 2.4 percentage points’ (p. 179). The same OECD study concludes that ‘The link between house price developments and movements in aggregate demand suggests that monitoring developments in property markets can provide a useful input to the setting of economic policy’ (OECD, 2000b, p. 181; see also, Greenspan, 1999).1 The boom of the housing market since the burst of the equity bubble has raised some concerns. Greenspan (2004c) emphasised the importance of ‘preventive actions’ which ‘are required sooner rather than later’ in order to ‘fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated’ (p. 4).2 Especially so, since ‘the existence, or even the perception, of government backing undermines the effectiveness of market discipline’ (p. 4). It is, therefore, suggested that ‘the GSE regulator must have authority similar to that of the banking regulator’, but also ‘GSEs need to be limited in the issuance of GSE debt and in the purchase of assets, both mortgages and nonmortgages, that they hold’ (p. 5).