House prices have room to fall further, says expert

Photo / Herald on Sunday

House prices in the world's major economies, which last year were down an average of 5 per cent from 2007, may keep dropping, said Prakash Loungani, an adviser to the International Monetary Fund's research department.

"The corrections thus far have not erased all of the excesses generated by the house price increases," Loungani wrote in the March issue of the IMF's Finance and Development magazine.

"That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

Loungani didn't single out individual countries where homes may be overvalued.

The article said prices would probably decline further because they remained well above levels seen at the start of the housing boom around 2000, and also because values were higher than rents and income, which "serve as long-run anchors" on the cost of residential real estate.

Loungani said that between 1970 and the mid-1990s, increases in home prices in 18 nations lasted about five years on average, and values climbed 40 per cent after adjusting for inflation.

During that same 25-year span, declines lasted an average of about 4 years and prices fell about half as much as they rose, the article said.

In contrast, the most recent global housing expansion lasted 41 quarters, almost twice as long as average, and prices rose three times as much.

"Because prices rose much more sharply than in earlier upturns," Loungani wrote, "their decline might eclipse those observed in the past".

- BLOOMBERG