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Does the Rise in Housing Prices Suggest a Housing Bubble?

Published by Anonymous (not verified) on Wed, 08/09/2021 - 7:08am in

House prices have risen rapidly during the pandemic, increasing even faster than the pace set before the 2007 financial crisis and subsequent recession. Is there a risk that another dangerous housing bubble is developing? This is a complicated question, and the answer has many components. This post, the first of two, provides a more detailed look at the recent rise in home prices by breaking it down geographically, with a comparison to the pre-2007 bubble. The second post looks at the potential risks to financial stability by comparing the currently outstanding stock of mortgage debt to the period before the financial crisis and projecting defaults should prices decline.

The Sharp Rise in Housing Prices during the Pandemic

The U.S. economy shut down in March 2020 due to the pandemic. Yet, by the summer housing prices started to rise sharply despite high unemployment. How similar is this to the early 2000s? We would be worried if the housing market were playing out exactly as it did in the prior boom. In the time series, we aren’t there yet: so far, we’ve had about one year of double-digit price growth, compared to the national average compound annual growth rate of more than 14 percent between 2003 and 2005.

Home Prices Are Rising Faster Now than during the Bubble

Source: CoreLogic Home Price Index, January 2003-June 2021.

Spatial Patterns of Home Price Growth

What about trends at the regional level? It turns out that the boom is taking place in different places within and across metro areas this time around. For most places, recent home price growth has been even stronger than during the previous boom: 79 percent of metropolitan areas in our data saw higher growth rates during the pandemic than during the peak years 2003-05. Of the thirty metropolitan areas containing the most populated cities in the country, 63 percent saw higher growth during the pandemic compared to 2003-05. In the chart below, we plot a 45-degree line, colored in gray, to differentiate which of the metropolitan areas with the largest population saw their fastest growth during either the pandemic or the housing bubble. Austin, Charlotte, Seattle, and Atlanta are a few metropolitan areas above the 45-degree line, meaning they have had higher growth rates during the pandemic. On the other hand, Las Vegas, Los Angeles, Miami, and New York had higher growth rates during 2003-05 and are below the 45-degree line. Some areas, however, saw similar paces of growth: Sacramento had minimal variation between its pandemic and housing bubble growth rates, putting the city close to the 45-degree line.

At the regional level, the northeast and south have positive trends in the graph, meaning that price increases are positively correlated in the two boom periods, whereas the midwest and west have slightly negative trends. The midwest points are clustered between growth rates of 10-20 percent for the pandemic and between 0-10 percent for 2003-05, whereas the other regions are more spread out. The west has the majority of its points above the trendline, while the south has most of its points near or below the trendline. The northeast points have the strongest positive relationship when compared to the other regions.

The blue regression line shows there is a positive relationship in the whole data set between house price growth during the housing bubble and the pandemic, meaning metropolitan areas that had high annual growth between 2003-05 saw higher growth rates during the pandemic, and vice versa. But note how flat the regression line is and how far away most of the dots are from the line, suggesting the relationship is weak. Many metropolitan areas that experienced fast-growing housing prices in 2003-05 have had slower growth rates during the pandemic and vice versa.  

Most Metro Home Prices Have Grown Faster during the Pandemic than during 2003-05

Source: CoreLogic Home Price Index.

Note: Each city represents the home price index of its respective metropolitan statistical area.

House Prices in Urban Areas Have Been Growing More Slowly than in Suburban and Rural Areas

The data above cover metropolitan areas and include both urban and suburban housing. A breakdown along these lines shows that house prices in urban areas have grown at a slower rate than those in suburban areas during the pandemic. To arrive at our urban classification, we first define the zip code that has the highest employment density, which we call the employment hub. We categorize zip codes as “urban” if they are within five miles of the employment hub, belong to a metropolitan statistical area, and have a population density greater than the 95th percentile. For suburban areas, we categorize zip codes as “suburban within 5/10/15/15+ miles” if they are within 5, 10, 15, or 15+ miles of the employment hub and if they are not already classified as urban (or any other suburban category).

As seen in the chart below, urban areas defined in this way have usually had the higher year-over-year house price growth compared to suburban areas, but starting around November 2018, these urban areas began to see lower rates of growth compared to suburban areas. Once the pandemic took hold in March 2020, urban areas did see a sharp increase in price growth, but suburban areas grew much faster and are above 15 percent year-over-year growth, whereas urban areas are around 10 percent. There are exceptions to even the relatively modest growth in urban areas: Manhattan (New York County) saw a price decline of 4.3 percent year over year in June, the largest county price decline nationwide.

Of course, many factors other than relative location may affect price growth. But urban classification is a significant characteristic even controlling for some of these other factors. The significant lag of home price growth in the past year isn’t attributable to zip code income or the level of home prices before the pandemic. When we control for these factors, it turns out that dense urban areas had been growing at a pace close to that of other parts of metro areas, until 2020 when they fell way behind.

Urban Home Prices Have Underperformed during the Pandemic

Source: CoreLogic Home Price Index.

There are also regional differences within urban areas. The northeast is not growing as rapidly as the midwest, west, and the south. Up until the end of 2020, all regional lines were following similar trends throughout the pandemic. At the beginning 2021 the west, south, and midwest continued to grow rapidly while the northeast began to see a slight stagnation in growth. These regional differences may have to do with the different rates of growth of cities in these areas compared to cities in other areas, and this shows how the urban classification can manifest differently depending on the region.

Urban Zip Codes Have Slower Home Price Growth in the Northeast

Source: CoreLogic Home Price Index.

Although prices are increasing rapidly nationwide, the data show we are not simply repeating the housing market bubble of the early 2000s during the pandemic. This boom is taking place in different metro areas and in different locations within metros. Still, home price growth in excess of 15 percent per year can’t be sustained forever, so a remaining question is how price growth will normalize and what the consequences of a decline in prices could be. We turn to this question in our next post.

Andrew Haughwout is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Belicia Rodriguez is a senior research analyst in the Bank’s Communications and Outreach Group.

How to cite this post:
Andrew Haughwout and Belicia Rodriguez, “Does the Rise in Housing Prices Suggest a Housing Bubble?,” Federal Reserve Bank of New York Liberty Street Economics, September 8, 2021, https://libertystreeteconomics.newyorkfed.org/2021/09/does-the-rise-in-h....

Related Reading
Mapping Home Price Changes (interactive)
Keeping Borrowers Current in a Pandemic (May 2021)
Do People View Housing as a Good Investment and Why? (April 2021)

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Government To Allow Under 30’s To Sell Their Organs For A House Deposit

Published by Anonymous (not verified) on Thu, 13/05/2021 - 9:38am in

The Government has announced that they will be easing restrictions around the selling of organs to allow those citizens under 30 the chance to become property owners.

”We know that it is tough at the moment for young Australians to enter the property market so we’ve done something about it,” said the Treasurer. ”Going forward a house won’t cost you an arm and a leg, just a kidney or spleen.”

When asked how this would help the already over inflated property market, the Treasurer said: ”It will help greatly, especially older Australians.”

”As the homes they own will be worth more and if they need it they’ll be able to source some fresh young organs to help keep them alive.”

”Now, if you’ll excuse me, I saw a baby with some candy I might go and explain to it how the tax system works.”

Mark Williamson


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No, really; everything's fine

Published by Matthew Davidson on Fri, 05/10/2018 - 10:01am in

Among the headlines in the AFR Real Estate section this morning:

So, soft landing?: "Allianz-owned PIMCO, like many analysts, expects a decline in overall housing prices of 10 per cent over the next couple of years and says the market slowdown engineered by macroprudential regulator APRA does not indicate a crash likely to threaten financial stability."

What's happened since the last time I looked at private sector debt to GDP ratios? Not much, but something:

If you zoom in on the post-GDP period (caution: non-zero y-axis origin ahead):

(Source: BIS total credit statistics)

Usual disclaimer: This is the rear mirror view. Only part of the picture, and systemic crises may be closer than they appear. The fall in the total since 2016 is entirely due to the corporate sector; the situation for households is no better than a couple of years ago. To get household debt down in the face of falling property values (which should never have been allowed - indeed encouraged - to get that high in the first place) somebody has to do some spending to both raise GDP and the income necessary for repayment of household debt. Corporations won't do it; they are delevering. Households can't do it; they have debt, not savings.

The government must step in to fill the spending gap by increasing benefits and decreasing taxes on households, and by employing (lots of) people. If they don't, the best outcome will be a continuation of the post-GFC new normal of stagnation and unnecessary hardship. As far as I can see, an Australian domestic mortgage-backed crash is no less likely in 2018/19 than in 2016, and the qualitative evidence (not least: sanguine predictions by very smart people with very vested interests, designed to quell restive animal spirits) points in the same direction.

'Straya: Basically, she's rooted mate

Published by Matthew Davidson on Thu, 06/07/2017 - 10:58am in

Charts! Nobody asked for them, but I have them anyway! Over the last few years the Bank for International Settlements have been publishing a fab set of statistics that are not usually brought to bear in the tea leaf reading of mainstream economists. This is a shame, as they are exactly the sort of statistics which would indicate the risk of imminent financial crisis. Last month the BIS updated the data to the end of (calendar year) 2016. Here's an illustration (courtesy of LibreOffice) of where Australia is, relative to some comparable and/or interesting countries (click to embiggen):

As the BIS explains, the Debt Service Ratio (DSR):

"reflects the share of income used to service debt and has been found to provide important information about financial-real interactions. For one, the DSR is a reliable early warning indicator for systemic banking crises. Furthermore, a high DSR has a strong negative impact on consumption and investment."

So as a measure of Australia's ability to pay at least the interest on our private sector debts, if not pay down the principal, you might think this is not a bad result. We clearly substantially delevered after the GFC, thanks in large part to the Rudd stimulus pouring public money into the private sector, then levered up a bit since, but we've ended up between Canada and Sweden, which is a pretty congenial neighbourhood. But this is total private sector debt; what happens when we take business out of the equation and just look at households (and non-profit institutions serving households - NPISHs)?

Woah! Suddenly we're in a league of our own. Canada's flatlined here since the GFC, meaning the subsequent increase in their total private debt burden has largely come from investment in business capital. In such a case, provided this investment is directed at increasing productive capacity, and is accompanied by public sector spending to proportionally increase demand, this is sustainable debt. Australia has been doing the opposite.

Here's another way of looking at the coming Australian debt crisis, private sector credit to GDP:

This ratio will rise whether the level of debt rises, GDP falls, or both, so it's another good indicator of unsustainable debt levels. The current total level (in blue) of over 200% is at about the ratio Japan was at when its real estate bubble burst in the early 1990s. Breaking this down again into household and corporate sectors, we see that over the mid-1990s Australia switched the majority of its private sector borrowing from business investment to sustaining households. What happened in the mid-90s? Data here from the OECD:


From the mid-1990s to 2007 Australia experienced the celebrated run of Howard/Costello government fiscal (or "budget") surpluses. We all know, or should know, thanks to Godley's sectoral balances framework, what happens when the public sector runs a surplus: the private sector must run a corresponding deficit, equal to the last penny. There is nowhere else, net of private sector bank credit creation (which zeroes out because every financial asset created in the private sector has a corresponding private sector liability), for money to come from. When the government taxes more than it spends, it is withdrawing money from the private sector. Mainstream economics calls this "sustainable", and "sound finance", meaning of course it is nothing of the sort.

How did the private sector, and the household sector in particular, continue to spend from that point onward, behaving as though losing money (not to mention public infrastructure and services) down the fiscal plughole was not merely benign but quite wonderful? It chose to Nimble it and move on, going on a massive credit binge. The banks were happy to provide all the credit demanded, because the bulk of the lending was ulitimately secured by residential real estate prices, and these were clearly going to keep rising without limit (thank heavens, because if they were to fall like they did in the US in 2007…).

The Global Financial Crisis put a dent in the demand for credit, but as subsequent government fiscal policy has tightened, under the rubric of "budget repair", it is rising again. We are already in a state of debt deflation: Australia's household debt service ratio (as above), at between 15 and 20 percent of household income for over a decade, has dampened domestic demand, leading to rising unemployment and underemployment, leading to more easy credit as a quick fix for income shortfalls ("debtfare"). More of what income remains is redirected to debt servicing rather than consumption, and so we spiral downwards, our incomes purchasing less and less with each turn. [I will post more about some of the social and microeconomic consequences in (over-)due course.]

The Australian government needs to spend much, much more - and quickly. Modern Monetary Theory, drawing on an understanding of the nature of money that goes back a century, shows us that government spending (contrary to conventional wisdom) is not revenue-constrained; a currency-issuing government can always buy anything available for sale in the currency it issues. There is nothing about our collective "budget" that needs repairing before we can do so. The same data from the OECD shows that most currency-issuing governments with advanced industrial economies run fiscal deficits almost all the time:

In fact, under all but exceptional conditions, government fiscal surpluses (i.e. private sector fiscal deficits) are a recipe for recession or depression. The greater the surplus, the greater the subsequent government spending required to lift the private sector out of crisis, as can be seen above in the wild swings in neoliberal governments' fiscal position from the mid-90s on. The fiscal balance over any given period is nothing more than a measurement of the flow of public investment into the private sector. What guarantees meaningful sustainability is a government's effective use of functional finance to manage the real (as opposed to financial) economy in pursuit of public policy objectives. Refusing to mobilise idle resources (including, crucially, labour) for needed public goods and services is not "sound finance"; it is the very definition of economic mismanagement, as was once widely recognised:

"It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

"In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and businesses can be carried on.

"Improved nutrition, rural amenities and social services, more houses, factories and other capital equipment and higher standards of living generally are objectives on which we can all agree. Governments can promote the achievement of these objectives to the limit set by available resources.

"The policy outlined in this paper is that governments should accept the responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment. To prevent the waste of resources which results from [un]employment is the first and greatest step to higher living standards."

Australian Government, 1945, White Paper on Full Employment

We chose to forget all this from the 1980s onward. We can choose to remember it at any time.