The Housing Chronicles Blog: Sorry, but this housing bust isn't that special

Sunday, April 20, 2008

Sorry, but this housing bust isn't that special

According to a story in the Financial Post of Canada (hat tip:, a new report issued by Goldman Sachs concludes that the current housing bust is well in line with those experienced by other countries in the past and price declines are the consequence of a boom which disconnected from the fundamentals:

The United States may be suffering its worst housing bust since the Great Depression but by international standards it's not so special.

A new report by Goldman Sachs suggests the United States is going through a garden variety housing downturn that will involve a sharp slowing in overall economic growth and a sluggish recovery that equity markets will nevertheless sniff out well ahead of time...

The biggest decline in price terms was the Netherlands which posted a 50% decline in prices in the early 1980s, Finland at 49% and Japan at 44%. Together with slumps in Sweden and Spain, these are considered the "Big Five" crashes and were accompanied by banking crises, saw significant public bailouts, had fiscal costs ranging from 4% to 24% of GDP, and caused great economic damage.

On average, real house prices tended to fall about 30% and only bottomed after six years.

Interestingly, almost every country has had two busts including Canada, which also posted a 16 quarter 21% price decline in the early 1980s, the U.K., Germany and Japan.

As Goldman expects the United States to end up with a cumulative house price decline of 30% to 35% - prices are down about 11% so far - over the next 18 months, its slump looks comparable to the international experience...

There are some differences however.

Nominal short-term interest rates seem to have peaked before real house prices peaked and easing began about a quarter later than the experience of other OECD busts.

U.S. equity prices have also been atypical, rising even after the initial price bust and only acknowledging the damage a year after the bust began in late 2006.

In general, equity prices tended to peak nearly two years ahead of house prices. The trough in equity prices occurred on average around five quarters after the bust began, ahead of the trough in GDP and well before the housing bust ended.

Of course there is always a chance the current U.S. bust ends up making the Big Five the Big Six crashes but Goldman does not expect so - so far.

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