Recent House Price Developments: The Role of Fundamentals

Posted: 1 Jun 2010

See all articles by Nathalie Girouard

Nathalie Girouard

affiliation not provided to SSRN

Mike Kennedy

affiliation not provided to SSRN

Paul Joseph Van Den Noord

affiliation not provided to SSRN

Christophe Andre

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Date Written: January 23, 2006

Abstract

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.

Keywords: House prices, housing markets

JEL Classification: R21, R31

Suggested Citation

Girouard, Nathalie and Kennedy, Mike and Van Den Noord, Paul Joseph and Andre, Christophe, Recent House Price Developments: The Role of Fundamentals (January 23, 2006). Available at SSRN: https://ssrn.com/abstract=1618196

Nathalie Girouard

affiliation not provided to SSRN ( email )

Mike Kennedy

affiliation not provided to SSRN ( email )

Paul Joseph Van Den Noord

affiliation not provided to SSRN ( email )

Christophe Andre (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

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