Calgary Herald article

Housing crisis could spread: bankers
Alister Bull, Reuters
Published: Saturday, September 01, 2007

Weakness in the U.S. housing market could trigger an international slide in home prices that depresses the sector for years, a top housing specialist warned central bankers Friday.

"The United States, as the premier example of a capitalist economy, has the potential to lead price expectations down in many countries," said Robert Shiller, in a paper presented at the Kansas City Federal Reserve's monetary policy conference in the mountain resort of Jackson Hole, Wyo.

"It is not improbable that we will see such large real price declines extending over many years in major cities that have seen large increases," Shiller said.
Unpredictable U.S. housing prices "could reverse and head back up," says Prof. Robert Schiller.
Unpredictable U.S. housing prices "could reverse and head back up," says Prof. Robert Schiller.

Central bankers, economists and academics from around the world have gathered here to discuss the relationship between housing and monetary policy against a backdrop of global financial turmoil.

Fears about contagion from troubles in the U.S. subprime mortgage market have hit credit availability and threaten to slow economic growth.

Shiller, a professor of economics and finance at Yale University, said the dramatic rise in house prices witnessed in a number of advanced economies created serious challenges, and it was very tough to predict what lay ahead.

"The implications of this boom and its possible reversal in coming years stands as a serious issue for economic policy-makers. It may be hard to understand from past experience what to expect next, since the magnitude of the boom is unprecedented," he said in prepared remarks, released to the media prior to delivery.

The decline in U.S. house prices picked up speed in the second quarter, falling 3.2 per cent on the S&P/Case-Shiller national home price index, after a 1.6 per cent drop in the previous three months.

A big part of the problem for policy-makers was the role of psychology in driving up house prices, leading to a speculative bubble that was much more prone to a swift correction impacting a number of otherwise unconnected housing markets.

"Speculative markets are inherently unpredictable, and . . . the incipient downturn in the United States could reverse and head back up," said Shiller.

He cited the experience of the London property market, where prices doubled between 1983 and 1988 and then went into freefall, losing 47 per cent by 1996.

However, prices there then took off again, pausing briefly in 2004 and 2005 before resuming an upward march that defeated forecasts and has defied explanation.


© The Calgary Herald 2007