Recent House Price Developments: The Role of Fundamentals

TLDR

In most OECD economies, real house prices have risen strongly since the mid‑1990s. The paper examines whether the current house‑price surge in 18 OECD countries is consistent with fundamentals and what a potential correction would mean for real activity. It compares recent price run‑ups to the past 35 years and evaluates current valuations against multiple benchmarks. The analysis finds that the current real house‑price rise is unprecedented in size, duration, and cross‑country synchronicity; overvaluation is limited to a few countries and depends on persistently low long‑term rates; and a downward adjustment would likely be large and protracted due to price stickiness and low inflation.

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.