from Merijn Knibbe
There seems to be a debate about why house prices in the USA rose (and fell). House prices did not only rise in the USA (table 1). An explanation for the rises can’t, therefore, be confined to the USA. An explanation also has to take into account that there were some countries were prices did not increase (Japan, South Korea, Germany). Rising household incomes do explain part of year to year changes but as real household income did hardly increase in the long term, it’s not a good explanator for long term increases.
Table 1. Real prices of houses, different countries, 1970-1974 = 100. Bank of International Settlement data spliced to deflated Eurostat data.
So, what caused the differences? Interest rates? These were low (and even lower) too in Germany and Japan. The IMF answer is, however, clear. Summarized: reckless lending. In IMF parlance:
” In the United States, Canada, and Australia, the share of the total household sector’s outstanding loans issued by nonbanking financial institutions (read: shadow banking, do not read: organisations like Fannie Mea and Freddie Mac, M.K.) had doubled by 2005 compared with the 1980s …. This shift was accompanied by the introduction of new mortgage instruments and easier lending policies, and all these changes contributed to the rapid growth of mortgage credit in these countries. By contrast, in some continental European countries (read: Germany and Italy, M.K.) and in Japan, the reform process was slower and/or less comprehensive…. public sector financialinstitutions (read: institutions like Fannie Mae and Freddie Mac, M.K.) continued to dominate the residential mortgage market in these countries, and this constrained the forces of competition: on average in these countries, nonbank financial institutions accounted for about 1 percent of total outstanding loans to the household sector in 2005 (up only slightly from the mid-1990s), compared with about 30 percent in the United States.”
The IMF report continues like this: the more deregulation, the higher the debt level. They do not call it ‘reckless lending’. I do. Why this difference? The IMF does not use the right variable to estimate the private debt level. The level of mortgage debt should, of course be expressed as a percentage of disposable household income (better even: of disposable house owning households income) instead of as a percentage of GDP, as the IMF does. Using the right variable, as the banks should have done and still should do, would often double the estimated total debt level, to percentages of 100% or even 200% of disposable income. That does feel reckless.