What will happen next in the housing market? The question comes up all the time in many countries, for an obvious reason: house prices jump around too fast for the good of the economy.
The price hyperactivity does not follow a uniform pattern around the world. Look at the indices of average prices for dwellings by nation, adjusted for inflation, compiled by the Bank for International Settlements. Since 2000, the real average price is up by 63 percent in the UK, by 49 percent in Switzerland and by 12 percent in the United States. The average Dutch price declined by 7 percent. In Germany, though, there has been so little house price action that BIS could only find data back to 2003. Since then, the average German price is down by a tiny 1 percent in real terms.
Basic economic indicators – GDP growth, employment levels and general price levels – can explain almost none of this variation. The patterns in the American and European economies over the last 13 years have been far more similar than the house price trends.
Concrete variations in the balance of housing supply and demand are more relevant, but more for differences within than between countries. Variations in planning rules and demographic patterns have been nowhere near large enough to explain the sharply different direction of house prices.
Finance is more relevant. The amount that people actually pay for housing is closely related to how much money they can get their hands on. That sum is strongly influenced by such financial factors as monetary policy, lending practices and tax rules. These have moved much more than anything in the real economy. For example, tax changes explain much of the Dutch house price fall.