The Unassuming Economist

From the Wall Street Journal by Nick Timiraos:

An index tracking global property prices in 50 countries shows prices haven’t much risen over the past five years, but new research from the International Monetary Fund shows how averages can be misleading.

The IMF divided those countries into two groups. The first group of 33 countries, which includes the U.S. and the United Kingdom, are those where prices are still recovering. Prices in this group ran up strongly before the 2008 financial crisis and dropped sharply after it hit. These countries have also witnessed a generally slower economic rebound.

The second group of 17 countries, which includes Australia, Canada and China, had a smaller pre-crisis housing boom and have seen stronger post-crisis economic growth.

The result shows a very clear tale of two recoveries. Home prices in the 33 “recovering” countries are around 20% below their 2008 levels, while prices in the 17 “rebounded” countries are roughly 25% higher.

(The recovering countries are Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Malta, Mexico, Netherlands, Poland, Portugal, Russia, Slovak Republic, Slovenia, South Africa, Spain, Thailand, United Kingdom, and the U.S.

The rebounded countries are Australia, Austria, Brazil, Canada, China, Colombia, Germany, Hong Kong, Israel, Luxembourg, Malaysia, New Zealand, Norway, Philippines, Singapore, Sweden and Switzerland.)

A smaller subset of these countries shows a similar story for mortgage credit. Credit has expanded far more slowly in the recovering countries than for the rebounded countries.

Those countries with stronger housing markets have enjoyed better economic growth. The gross value added of construction and real residential investment are both 15% higher than in 2008, while those countries with weaker housing markets have seen only a small uptick in the last year.

Of course, policy makers in countries with stronger housing markets may also face greater challenges, given concerns that prices may be rising in an unsustainable way. Earlier this year, the IMF began its “Global Housing Watch” as part of an effort to curb complacency among regulators and policy makers about housing bubbles.

The latest IMF report flags China as a particular cause for concern. “The challenge is to allow for the necessary correction in real estate markets while preventing an excessively sharp slowdown,” write authors Hites Ahir and Prakash Loungani.

Canada and Israel are modestly overvalued, the authors write, while Norway and Sweden are substantially overvalued. While the United Kingdom has seen substantial price gains over the last year, sparking concerns from central bankers, the IMF classifies it in the basket of “recovering” markets because it experienced sharp price declines from 2008 to 2010.