High house prices may be global systemic risk

Subject

The rise in global house prices.

Significance

In the first quarter of 2015, the global house price index, aggregating prices in 52 countries, was at about the same level as in early 2007, according to IMF data. This recovery has occurred in a period of wage gains in most emerging markets (EMs), but little or no growth in household income across most advanced economies. Living costs excluding housing have stagnated and interest rates have been exceptionally low. Yet US interest rates are rising now and global prices are unlikely to keep falling beyond 2016, while many EMs have slumped into recession. As households are hit by more adverse trends, property markets and the related sectors will be affected.

Impacts

• The EM house price boom will be curbed by slowing income growth and weaker economic prospects.
• High house-prices-to-household-income ratios and household debt might require the introduction of macroprudential tools.
• The US housing market will stay affordable compared to its long-term average and to Europe's.