Housing slump will prolong recession, IMF warns

Other News Materials 9 October 2008 07:46 (UTC +04:00)

The history of housing market cycles has shown that when economic contractions are coupled with housing price corrections then recessions are prolonged and painful, the International Monetary Fund warned Wednesday.

After a steady upward climb over the past decade, home prices are now plummeting in several advanced economies, which is not surprising as they were largely over valued, reported dpa.

"Roller-coaster rides in the housing markets can be fairly long. When the roller-coaster is going up, that takes as long as six years and house prices go up 45 per cent," said Prakash Loungani, advisor in IMF's Research Department.

"When it starts its descent, that process can take as long as four years and prices fall about 25 per cent ... the US housing market correction, which began in 2005 is pretty far along, using history as a guide."

Lougani said the housing market roller-coaster is descending in virtually every major advanced economy - all across Europe, Canada, Australia, New Zealand - with prices dropping 5 to 15 per cent this year alone.

At the centre of the global financial meltdown is the US housing market downturn, which the IMF called "unprecedented since the Great Depression" of the 1930s.

The plunge in US housing prices, which has sparked a record number of home foreclosures that have decimated the value of banks' mortgage-related assets, will not reach bottom until 2009. One major segment of the housing market, the subprime market, has virtually disappeared.

"An average recession lasts about a year. But when it coincides with the housing corrections you have to add on three months. So recessions are going to be longer and they're going to be much more painful," Loungani said.

The coincidence of a recession and a housing slump leads to increased unemployment. Again citing the example of the US, he explained that in a recession, unemployment tends to go up about 2 per cent. But when there is a simultaneous housing correction, then unemployment is doubled.

The IMF warned that property bubbles similar to the one in the US were playing out in a number of European countries and Australia.

Britain and Spain were two of those most severely impacted, which along with Ireland and Australia had experienced "unexplained" 20 to 30 per cent increases in property prices over the last decade.

IMF researchers calculated the "house price gap" or the difference between the price gains and "fundamental" factors such as growth in per capita disposable income, interest rates, working age population, and credit and equity prices.

The countries that had the largest "house price gaps" were Australia, Ireland and Britain (20 to 30 per cent higher), followed by France, Italy, the Netherlands and Spain (10 to 20 per cent).

The gap estimated for the US was 7 per cent, smaller than for other countries because the correction started taking place 18 months earlier. dpa ar pw

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