IMF Warns of ‘Benign Neglect’ on Housing Issues

La Sirena apartments for sale in Villaricos Almeria Spain
Despite signs of recovery in markets around the world, governments must “guard against another unsustainable boom,” the International Monetary Fund warns in a new report.

IMF focused on whether housing prices are “out of line with economic fundamentals,” one of the key issues that led to the global economic crisis. Looking at the house prices compared to rents and house prices compared to incomes found “ratios remain well above the historical averages for a majority of countries.”

This might surprise industry analysts in many countries, including Spain, where the housing recovery is still in its infancy. But the IMF report underscores that housing affordability and pricing trends are tied to a wide variety of economic factors which have long-term implications for both the local and global economies, and housing markets.

The IMF has launched a new Web site, the Global House Price Watch, to monitor key housing indicators in different countries.

The IMF research found that house prices in many countries, while still far below peaks, still represent historic high levels, especially when compared to other economic indicators. The IMF report cited Australia, Belgium, Canada, Norway and Sweden as among the countries where the ratios are above historic levels, but Spain made the list, as well. (See charts below.)

But the ratios only tell part of the story. “Judgments about housing valuation also require supplementary information, such as credit growth, household indebtedness, lender characteristics, and the method of financing,” IMF deputy managing director Min Zhu wrote.

The tools for “containing housing booms,” such as increased capital requirements and interest rate manipulation, are still in their development stages and “the evidence on their effectiveness is only just starting to accumulate,” Mr. Zhu wrote.

Determining the impact of the interaction of various policy tools can be difficult to determine, “but all this should not be an excuse for inaction,” Mr. Zhu wrote. He urged governments to take action sooner rather than later.

“We need to move from ‘benign neglect’ to an ‘all of the above’ approach when it comes to policy choices,” Mr. Zhu wrote.

IMF_Price_Income chart (1024 x 768)

IMF_Price_Rent chart (1024 x 768)

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