House prices in 16 countries have risen more than fundamental factors would support over the past decade, with Ireland easily atop that list, the International Monetary Fund (IMF) said today.
In its twice-yearly World Economic Outlook, the IMF tried to figure out how much further housing prices may need to fall and what the economic consequences might be.
They looked at housing price increases from 1997 to the end of 2007, and calculated how much of the gains in each country could not explained by fundamental factors such growth in per capita disposable income, working-age population, credit and equity prices, and interest rates.
The difference between the price gains and fundamental factors, which IMF researchers called the "house price gap", gives an indication of the potential for prices to correct.
Ireland had far and away the biggest house price gap at about 30 per cent, following by Britain, Australia, Norway, France, Sweden and Spain.
The United States, which triggered the financial crisis when its housing market went bust, came in at 15th with a gap of around 7 percent, although that was partly because house prices had already fallen sharply.
Historically, when house prices fall while the economy is weakening and credit conditions tightening, the economic consequences are significant, the researchers said.
Looking at data going back to 1960, they found that recessions associated with house price busts and credit crunches were longer and deeper than other downturns.
"The duration of a recession is more than one quarter longer in the case of a housing bust, total output loss during the recession is somewhat higher, and the unemployment rate increases notably more and for longer in recessions with housing busts," they wrote.
Reuters