A comparison of recent real estate cycles in Spain, the United States and the United Kingdom

The real estate sector experienced a very dynamic cycle from the second half of the nineties until very recently in many countries, which was reflected in striking increases in house prices and a growing importance of the construction sector in the economy. This boom phase of residential markets has been followed by a phase of decline during which prices and activity have fallen off. Although prices and amounts have performed similarly in the various countries, in certain cases, movements have been comparatively more pronounced. Also, although the features of the property cycle were relatively widespread, certain areas were unaffected. Chart 1 illustrates the dimension of this cycle in terms of prices. Thus, between 1998 and 2006, the strong momentum of housing markets in the United States, the United Kingdom and Spain, among other countries, resulted in considerable year-on-year price growth – in many cases above 10% in real terms – a phase which has been followed by a notable correction. By contrast, in other economies such as Germany and Japan, there has not been an upward cycle. Since the upswing in the property cycle (and its subsequent correction) coincided in many economies, the analysis of the property sector in one specific country is frequently extrapolated to other areas. To a certain extent, this extrapolation is justified by the existence of several global factors which contributed to the sharp upturn in housing markets. However, there are also other idiosyncratic factors which are highly relevant for characterising developments in the property sector in each country. This article investigates the relative importance of the shared features and those specific to the three economies which have experienced a very pronounced property cycle: Spain and the two main English-speaking countries (the United States and the United Kingdom). As a first step, certain important analytical considerations regarding the property sector are briefly addressed. Next, how the property boom phase evolved in the three countries and the factors influencing it are described. The two following sections focus on the adjustment process and its macroeconomic implications. Lastly, the conclusions underline how the idiosyncratic features of the residential property cycle in these economies condition differences in the intensity and duration of the adjustment process.