Housing market lessons from around the world

Robert Edelstein, professor and co-chair, Fisher Center for Real Estate and Urban Economics | 4/6/12 | Leave a
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The global financial crisis, which originated in US housing and finance markets, has kindled interest in
housing markets worldwide. How did housing in other countries fare? How did policymakers deal with
the impact of the spreading crisis? National housing markets and financial systems differ significantly
across the globe, and these differences are useful for explaining the wide diversity of experiences of
different national housing markets during the worldwide financial and economic crisis. These
variations are illustrated in an edited book that my colleagues, Ashok Bardhan, and Cynthia Kroll, and
I recently published, entitled, Global Housing Markets: Crises, Policies, and Institutions
(Wiley and Sons: 2012).The articles in the book examine housing issues in 20 countries before,
during and after the financial crisis of 2008-2009.
The U.S. housing market and mortgage system are variegated and complex, compared to those in
other countries. The U.S. financial institutions offer a wide range of loan choices for borrowers, and
harness capital from a variety of sources. About two-thirds of the U.S. households own their own
homes, similar to rates found in many parts of the world, but the U.S. governments role in housing
production is relatively small. The U.S. housing finance system stands out for having a mortgage
interest tax deduction, a relatively high proportion of long-term fixed interest rate mortgage loans, no
fees for mortgage prepayments, and a predominance of non-recourse loans (i.e., mortgage secured
only by the house, and not the borrowers other assets).
Different countries experiences highlight the tradeoffs between tightly regulated markets, which may
offer stability, and more dynamic and flexible systems which may be riskier, but provide opportunities
for efficiency, innovation, and growth. For example, the German housing market has much less
emphasis on home ownership, strict financial regulations, and has not seen rapid appreciation in
homes since a Berlin bubble at the outset of unification. In both Germany and Denmark, covered
bonds have provided a steady source of credit for home purchases, while limiting leverage and other
types of risk. Irelands housing boom and bust came closer to matching the US in severity,
exacerbated by massive capital inflows, trade exposure and negative real interest rates. Spain also
was severely affected by global linkages, in the shape of foreign demand for vacation homes, as well
as by risk-taking by small local savings institutions.
It is clear that global linkages can amplify effects either through financial markets or trade. For
example, the impact of the financial crisis on Japan came through the severe contraction of
international trade and the negative shocks felt through global credit markets. In contrast, China and
Singapore employed government control and ownership of land to alternately dampen surging prices
or stimulate the market, sometimes with moderate, at best, success. There appears to be a growing
disconnect between incomes and home prices in the many metropolitan areas in China, and pent-up
demand and cash-rich state enterprises have further fueled the boom.
In countries where there is household risk sharing through full recourse mortgages, prepayment
penalties and the absence of mortgage interest deductions, upswings might be dampened, but the
homeownership rate and household mobility may be adversely affected. Agile and timely regulatory
responses can be helpful in either shortening or diminishing the housing bust cycle, and deterring the
system from entering into a housing depression.
The study of the experience of housing markets and finance systems from around the world
contributes to a better understanding of how economic, historical, regulatory institutional factors as
well global linkages influence national economies and housing markets during financial crises, and may
help inform US policy going ahead.