Real Estate: Home Prices Falling Around the World

If declining home values have you down, and you'd like some company in your misery, here's a glimmer of good news: when it comes to the housing downturn, the United States is starting to have plenty of company.

It's been nearly three years since U.S. home values peaked at the height of what was, in retrospect, a bubble fueled by low interest rates, speculation and a general giddiness as millions of Americans began to look at their houses not only as a place to live, but as an asset that would make them rich. For years the experts assured nervous homebuyers that nationwide home prices had never fallen year-over-year since the Great Depression—a record that's come to a painful halt as the average U.S. home has now lost more than 15 percent of its value.

Meanwhile, a similar transformation has been taking place in other countries. In much of the world, home prices soared during the first half of this decade, rising far beyond the levels that you'd expect, based on traditional economic factors. In the last year, however, many of those markets have seen their housing bubbles burst, too. In fact, during the first six months of 2008, a host of economies—including that of Denmark, New Zealand, the UK, Spain, Sweden, Canada and Norway—have seen home prices fall at a faster rate than is occurring in the United States.

In a study published this month, economist Prakash Loungani of the International Monetary Fund examined how this boom-bust cycle is playing out around the globe. He and his colleagues looked at how and why home prices rose in a variety of countries between 1997 and 2007. They tried to figure how much of the rise could be explained by traditional economic drivers like income growth, population growth, interest rates, the availability of credit and the wealth being created by rising stock prices. In a host of countries, home price gains went well beyond the levels you'd expect based on those variables, and the IMF study looks at this "house price gap" as one indicator of just how bubbly each country's housing market became. In Australia, Ireland and the U.K., this gap ranged from 20 to 30 percent, and in France, Italy, the Netherlands and Spain the gap ran between 10 and 20 percent. In the last year, home values in all those countries have begun to fall more quickly than they are in the United States.

"By now the U.S. has undergone substantial correction already, so that the other countries are experiencing much more profound changes in their house prices," says Loungani, who's based in Washington.

While optimists have begun looking for the bottom in U.S. home prices, in Europe the sense is that their roller-coaster ride is just getting started. "In Europe, we're in the more early stage of the downturn," says Ruth Stroppiana, the London-based chief international economist at Moody's Stroppiana says the overseas housing-bubbles were driven by many of the same factors that drove U.S. home prices so high—low interest rates and loose credit among them. (American lenders weren't the only ones offering mortgages for more than 100 percent of the value of a home.)

However, some experts believe there are differences that may keep overseas markets from falling quite as far as Americans' home values. While countries like the U.K. did experience some subprime lending, the practice of giving mortgages to less credit-worthy buyers never reached the proportions overseas as it did in the United States. That means other countries likely won't experience the level of foreclosures that America has seen. And while European countries did experience a building boom as home prices shot up during the early 2000s, no country went as wild over new houses and condos as America did. As a result, overseas markets aren't suffering the vast glut of never-lived-in houses sitting vacant on the market, which is making it hard to sell existing homes in many U.S. markets.

That doesn't mean that overseas real-estate markets are insulated from a painful price decline, however. Howard Archer, chief U.K and Eurozone economist at Global Insight, predicts that home prices in the U.K. will fall 16 percent in 2008 and another 15 percent next year. Home prices there won't bottom out until late 2010, Archer says, and when they do, they'll be 33 percent below the peak they reached in mid-2007.

Indeed, for all the talk about the unprecedented nature of the U.S. housing meltdown, when experts like Loungani look at the numbers in the context of global housing cycles, our recent experience seems slightly less remarkable. Loungani says that based on the IMF's review of housing cycles going back several decades, the average country sees home prices escalate by 45 percent during booms (which last, on average, about 6 years), and then sees prices decline about 25 percent during busts, which last an average of four years. For people anxiously awaiting the bottom of this painful U.S. housing bust, those numbers may be encouraging. Says Loungani: "The U.S. is approaching the fourth year and has had cumulative declines getting close to 25 percent, [and] we're trying to make the point that based on historical experience, the U.S. should be bottoming out mid-next year."

But the IMF research also contains some unpleasant findings about the way housing busts usually ripple across economies. IMF economists looked at how recessions played out across a host of countries, and one of the things they explored was the way in which a housing bust tended to exacerbate an economic downturn, particularly when it comes to unemployment. Simply put, during recessions that coincide with housing downturn, many more people tend to find themselves without a job. With U.S. unemployment already at 6.1 percent and the economy undergoing an evident slowdown due to the credit crisis and plummeting consumer confidence, our economic pain may continue even when America's housing woes reach their nadir.

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