Thursday, August 16

Are home prices the next bubble?

I am back at uni doing some study. In my research for an assignment on financial econometrics I came across this wonderful piece from December 2004. It was written by a senior economist and a vice president at the Federal Reserve Bank of New York.
Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy.

A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.

Moreover, weaker economic conditions are unlikely to trigger a severe drop in home prices. Historically, aggregate real home prices have fallen only moderately in periods of recession and high nominal interest rates.
It made me chuckle. It also had me wondering: Where have I read similar words about the Australian housing market more recently?

Of course the statements on the website of central banks and other government agencies need to be treated with some caution. They are rarely pieces of pure analysis. They are often written with an eye to potential market or social impacts. Sometimes the intent is to deliberately jawbone. And to be fair, this would have been the majority consensus opinion at the time.

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