Is an end to the asset bubble in housing cause for a recession?
"There is little doubt that house prices have become one of the dominant issues in the global economic outlook. The US Federal Reserve and the Reserve Bank of New Zealand are raising interest rates in order to curb housing booms. Australia and Britain have suspended interest rate rises because their housing inflation slowed dramatically more than one year ago. South Africa will probably raise interest rates later this year in part because housing inflation is driving rapid growth of consumer borrowing and expansion of the country’s current account deficit.
Housing inflation is likely to be the big challenge confronting Ben Bernanke when he moves to the Federal Reserve next week. US house prices have increased by more than 60 per cent during the past five years and were still increasing at a 13-14 per cent annual rate last quarter. The market value of residential real estate in the US is now equal to nearly 200 per cent of personal disposal income, compared with 160 per cent during the early 1990s. Mortgage-related assets are now equal to 61 per cent of bank credit compared with less than 50 per cent 10 years ago and 25 per cent during the 1970s.
The US housing market now has forms of mortgage lending that have not existed since the 1920s. In California, two-thirds of new mortgage loans now require interest payments only. Such forms of lending were common in the century before 1930 but declined sharply after the creation of Fannie Mae, the mortgage finance group, during the Great Depression. Alan Greenspan, the outgoing Fed chairman, produced a report in September estimating that households have been extracting $600bn-$700bn of real estate gains from their homes through mortgage refinancing activity."