Are we nearing another housing bubble?

252940-houseThe short answer is no.

Most people who sat through two and a half hours of The Big Short were ready to predict the next financial crisis, but nothing of that housing bubble’s magnitude can exist today. Those years were marked with blatantly illegal underwriting standards, and poor risk management procedures on all sides of the playing field: lenders, investors, regulators, and Congress. Misunderstanding the economics of housing can be detrimental for learning new lessons about economies from their housing market. Though major media outlets have largely ignored it since the recession, housing is still one of the most telling indicators about the future health of the US economy.

This week, the National Association of Realtors released the February existing home sales numbers that showed sales decreased in all four regions of the United States. The Northeast saw the highest decrease in home sales by over 17% and sales in the Midwest sank over 13%. As the Obama administration touts the continued recovery in unemployment, concern still remains about supply shortages and the affordability of homes, the bedrock of the American Dream. The decrease in home sales was driven by lack of inventory. Housing inventory is still down over 1% from a year ago, which creates another hurdle for first-time homebuyers, causing prices to continue to rise at rates above the historic median (the graph below shows how housing prices have increased just as rapidly as the pre-recession peak). Other countries’ economies have seen similar constraints in their housing markets such as Sweden and Australia, and learning lessons from studying their housing markets will be pivotal to addressing changes in the United States.


Similar to trends in the United States, Swedish apartments have appreciated 150% in the past ten years and home prices have doubled. According to a recent IMF report, the story of how home prices have appreciated diverges between major urban areas and other parts of the country. In Stockholm and Gothenburg, the population has increased since 1990 at a steadily greater rate than the rate at which the number of dwellings has increased. In more suburban and rural areas, population has increased steadily since 1990, but in 2009, the rate at which the number of dwellings increased and drastically outpaced the population growth. The lack of inventory in urban areas caused the price of homes to increase in urban areas while the overabundance of homes in suburban and rural areas had less of an effect. In the United States, millennials have flocked to San Francisco, New York, Chicago, Washington DC and Austin, and home prices in those cities have dramatically outpaced the rest of the country. The supply of new homes in Sweden has not been able to keep up with demand and its government has been forced to take measures to increase housing stock and decrease their mortgage interest deductibility. In the United States, the mortgage interest deductibility is one of the most agreed upon parts of the tax code and proposing a change to it would be a kiss of death for any member of Congress. So what can the United States do in order to combat a similar trend?

Another way that the Swedes could combat the demand for home prices would be to raise interest rates. Similar to the United States, rates in Sweden are at all-time lows. However, when Riksbank (Sweden’s central bank) did increase interest rates, unemployment slowed and fears began to bubble about deflation, quickly prompting the central bank to change its course. As the Federal Reserve receives backlash from investors, stoked by fears about Chinese and European crises, how can the US central bank act in order to help jumpstart the housing market? (Of course the United States could start by finishing the last lingering question from the Great Recession, what to do about Fannie Mae and Freddie Mac, but that is a type of Congressional Rube Goldberg machine).

In Australia, an affordability crisis has also impacted its major cities: Melbourne and Sydney. A recent report published by the Australian Population Research Institute examined how prices in major cities have increased dramatically, forcing most homeowners into historically high levels of debt. According to the APRI:

“This is because of the increasing demand from new resident households and new migrants in the face of limited growth in supply and the increasing share of established detached houses that will be occupied by households aged 50 or older…The surge in the supply of high-rise apartments will not address this shortage.”

The report goes on to say that a rise in interest rates would only exacerbate the affordability issues as it would “undermine the capacity of mortgagees to service their debt.” New Zealand and Australia currently have the highest home appreciation of any country and it is largely driven by the shifting population toward urban centers, similar to the United States.

Across the world, bad loans are plaguing economies, but there is no larger and more influential economy in which this is happening than China’s. China’s economy has been slowing and the rest of the world has been dragging behind it, but Chinese institutions are stoking the fire (see when the United States did this here). Chinese lending decreased in December, which inevitably means that the economy’s growth is going to be slowing down as well. However, home prices in Shanghai, for example have still increased 20%, while home prices in neighboring the neighboring city of Shenyang have slightly decreased. Recently, Chinese banks have released numerous new loan products and credit opportunities for borrowers, but as the economy slows down, these borrowers are finding themselves less able to make payments on these loans. A recent report cited by the New York Times expected that 22% of all Chinese loans will be nonperforming by the end of 2016. While that number is on the higher-end of predictions, it is no doubt worrisome as to how defaults and foreclosures will affect the Chinese economy and if it fell, how the global economy would react.
In the meantime, the United States needs to continue to monitor economic indicators of the housing market. Congress can help to create more construction by incentivizing builders, and GSE reform can help increase access to credit. As long as the conversation around housing finally moves on from the predatory practices of 2008, maybe policymakers can learn from Sweden, Australia, and China.


William Peri

Author: William Peri

Will is a senior in the Elliott School majoring in International Affairs and double majoring in Economics. He has had multiple internships at the Capitol, financial institutions, and two trade associations for trade and financial services policy. He is originally from New Jersey and enjoys politics, reading, Italian food, and coffee.