The house price crash was a productivity problem

International Journal of Productivity and Performance Management

ISSN: 1741-0401

Article publication date: 30 October 2009

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Citation

(2009), "The house price crash was a productivity problem", International Journal of Productivity and Performance Management, Vol. 58 No. 8. https://doi.org/10.1108/ijppm.2009.07958hab.003

Publisher

:

Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited


The house price crash was a productivity problem

Article Type: News From: International Journal of Productivity and Performance Management, Volume 58, Issue 8

Did inaccurate productivity data cause the housing bust? That is the interesting conclusion of James A. Kahn, a Yeshiva University economics professor and former vice president of the Federal Reserve Bank of New York, in “Productivity Swings and Housing Prices”. Kahn’s paper, assigns “primacy to fundamentals and only a supporting role to bubbles and credit market irregularities”. His model shows that productivity shifts correlate well (though not perfectly) to house prices since 1965.

“Housing market participants were slow to perceive the most recent decline in the rate of productivity growth because the data released through mid-2007 gave little indication of it”, Kahn suggests. “Subsequent revisions of the data made it clear that productivity had in fact begun to decelerate in 2004”.

Kahn explains: with the resurgence in productivity that began in 1995, market participants began to see stronger income growth-not from working longer hours or having a second household income, but on a per hour basis. As individuals became more aware that this stronger growth was attributable to technological progress and that it might be sustainable, they grew more optimistic about their future income, and this optimism directly influenced their willingness to pay for housing. Such optimism would probably have been shared by lenders, who viewed mortgages as less risky insofar as income and house prices were growing more rapidly than before.

A decade later, however, signs emerged that the new period of high productivity growth would not be as long-lived as the post-World War II episode, which had lasted more than twenty-five years. As buyers and lenders began to recognize this, the same process that caused prices to rise and credit conditions to ease began to work in reverse. The expected income growth did not materialize and new buyers entering the market were less willing to pay high prices; thus, prices of houses purchased in recent years failed to grow as expected. Foreclosures began to increase as early as 2005, and lenders became more cautious.

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