Housing Markets, Business Cycles and Economic Policies

From the mid-1990s to 2007, the vast majority of OECD countries experi-enced an exceptional expansion of their housing markets, both in terms of magnitude and duration. Deviating from historical patterns, the latest housing upswing has been disconnected from the business cycle, as the economic downturn of the early years of the century was not accompa-nied by a slowdown of housing markets. At the same time, household debt has reached record levels in many countries, largely as a result of low interest rates and a wide range of financial innovations on mortgage markets. Housing has contributed to the expansion of economic active-ity by enhancing the effect of interest rate cuts on economic growth: residential investment has been strong and wealth effects have supported private consumption, in particular in countries where mortgage markets were well developed. Econometric investigations point to a transmis-sion of housing wealth to private consumption through the refinancing of mortgages and home equity loans — more generally housing equity withdrawal. Financial innovations have contributed to excessive lend-ing and housing booms, which are at the root of the current financial turmoil. Tax systems favoring home ownership through tax deductibility or subsidies have sometimes exacerbated the problem.