Research by David Miles and Vladimir Pillonca of Morgan Stanley concludes that there are likelier candidates than America for a housing bust. In a recent paper covering 13 European countries as well as America, they assess how much of the rise in property values in the past decade can be put down to bubble-like optimism about future price increases. The authors constructed a model in which housing demand is driven by rising real incomes, population growth and declines in real interest rates. They then estimated the downward effect on prices from increased homebuilding. They argued that what is left—the part of price rises that is unexplained—is without substance and vulnerable to a correction.
In six countries—Belgium, Britain, Denmark, Greece, Spain and Sweden—real house prices have risen much faster than the model predicts. But in the remaining five countries, the average “excess” increase in real house prices is 47%. Some of the paper's results challenge accepted wisdom. Ireland's housing boom, often seen as a spectacular bubble, is almost entirely explained away by rapid real-income growth, rising population and the drop in real interest rates. Nevertheless, Irish house prices are now falling, if modestly.
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In six countries—Belgium, Britain, Denmark, Greece, Spain and Sweden—real house prices have risen much faster than the model predicts. But in the remaining five countries, the average “excess” increase in real house prices is 47%. Some of the paper's results challenge accepted wisdom. Ireland's housing boom, often seen as a spectacular bubble, is almost entirely explained away by rapid real-income growth, rising population and the drop in real interest rates. Nevertheless, Irish house prices are now falling, if modestly.
More here...
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