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Recent House Price Developments: The Role of Fundamentals

  • Nathalie Girouard
  • Mike Kennedy
  • Paul van den Noord
  • Christophe André

In the vast majority of OECD economies, house prices in real terms have been moving up strongly since the mid-1990s. Because of the important role housing wealth has been playing during the current upswing, this paper will look more closely at what is underlying these developments for 18 OECD countries over the period from 1970 to the present, with a view to shedding some light on whether or not prices are in line with fundamentals. The paper begins by putting the most recent housing price run-ups in the context of the experiences of the past 35 years. It then examines current valuations against a range of benchmarks. It concludes with a review of the links between a possible correction of housing prices and real activity. The main highlights from this analysis are as follows: 1) The size and duration of the current real house price increases; the degree to which they have tended to move together across countries; and the extent to which they have disconnected from the business cycle are unprecedented. 2) Overvaluation of real house prices may only apply to a relatively small number of countries. However, the extent to which these prices look to be fairly valued depends largely on longer-term interest rates remaining at or close to their current low levels. 3) If house prices were to adjust downward, the historical record suggests that the drops might be large and that the process could be protracted, given the observed stickiness of nominal house prices and the current low rates of inflation. Le rôle des fondamentaux dans l'évolution récente des prix des logements Dans la grande majorité des pays de l'OCDE, les prix réels des logements se sont accrus fortement depuis le milieu des années 90. Étant donné le rôle important joué par le patrimoine immobilier dans la reprise; cette étude examinera de près les facteurs ayant contribués à cette évolution afin de mieux cerner si les prix des logements depuis 1970, pour 18 pays de l'OCDE, sont justifiés par les fondamentaux. Cette étude commence par replacer les hausses les plus récentes des prix de l'immobilier résidentiel dans le contexte des évolutions observées au cours des 35 dernières années. Elle examine ensuite les prix actuels au regard d'un certain nombre d'indicateurs. Elle s'achève enfin par une analyse des liens entre un éventuel réajustement des prix des logements et l'activité réelle. Les principaux aspects de cette analyse sont les suivants: 1) L'ampleur et la durée de l'augmentation des prix réels des logements, l'homogénéité de leur évolution dans différents pays et leur découplage par rapport au cycle économique sont sans précédent. 2) La surévaluation des prix de l'immobilier n'apparaîtrait que dans un nombre relativement restreint de pays. Cela étant, pour considérer que ces prix sont justifiés, il faut, dans une large mesure supposer que les taux d'intérêt à long terme resteront pratiquement aussi bas qu'actuellement. 3) Si les prix des logements venaient à baisser, l'expérience passée conduit à penser que les baisses pourraient être plus importantes en termes réels et qu'elles pourraient être durables, compte tenu de la rigidité observée des prix des logements en termes nominaux et de la faiblesse actuelle de l'inflation.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 475.

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Date of creation: 23 Jan 2006
Date of revision:
Handle: RePEc:oec:ecoaaa:475-en
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