IMF sees housing corrections, monetary challenges

Ireland, the Netherlands, and the United Kingdom were the top three nations to have seen “unexplained increases in house prices” that in the decade ending in 2007 grew to 30% higher than the economic fundamentals would suggest, economists for the institution said in a report. Using its own index of unexplained house price appreciation, the IMF created a sliding scale of countries that have a “house price gap” that is out of proportion to the economy.

“A group of other countries, including France, Australia, and Spain have house price gaps of about 20%,” according to the study prepared for the IMF bi-annual World Economic Outlook. The report will be released in full next week in conjunction with the meeting of IMF members in Washington. The report ranked the United States in the middle among nations vulnerable to a correction, noting that US home prices have already fallen. Falling home prices and failing mortgages in the United States have helped spark a global credit crunch that is now constricting markets.

The report said recent price gains and threat of a drop are a sign to many monetary policy-makers that they should consider national home prices as an important economic factor. Nations that have high mortgage debt and a robust housing market should be particularly mindful. “Moreover, the prospect of a sharp boom-bust cycle in the housing sector in several advanced economies has reignited the debate on how monetary policy, which seeks to influence inflation outcomes by raising or lowering interest rates, should respond to developments in the housing sector,” an online introduction to the report said.

While monetary policy-makers should be watchful of home prices as an indicator of other economic conditions, the report stated, they should not build policy around a specific level of home prices. “House prices should be one of the many elements to be considered in assessing the balance of risks to the outlook,” the report said. However, “policy should not target specific housing price levels.” “Easy monetary policy at the beginning of the current decade (in the US) seems to have contributed to the run up of housing prices,” the report stated. In the United States, a multiyear run up in home values came to a halt in 2006 and national home prices declined in 2007. Homes values in Ireland, too, fell last year for the first time since 2001. (Reuters)