Overview

This article estimates the scale of the housing "bubble" in the United States, a cause of growing concern, and considers the likely impact of its bursting.

Since mid-2004, the upward trend of house prices has accelerated, recording year-on-year growth of more than 10%. The reasons include (i) a rise in the price that households are able to pay for housing, (ii) a rise in the number of households of house-buying age and (iii) the development of a wide variety of loan products.

The rise in house prices has boosted consumer spending through the assets effect. Moreover, the volume of funds raised by households taking out housing loans greatly exceeds the amount invested in housing, and it is likely that much of the surplus is being diverted into consumption spending.

With the ratio of households acquiring a second home and buying houses for investment purposes rising, it appears that a "bubble" is forming in the US housing market. Current house prices are estimated to be 20-30% higher than the "appropriate level", and a fall in house prices could have a negative impact on the US economy.

One event that could cause the housing bubble to burst is a rise in long-term interest rates. Including its indirect effect through the curbing of investment in housing, a 1% rise in long-term interest rates would be likely to cause house prices to fall by 6.9%. In this case, quarter-on-quarter growth of consumer spending would fall to an annualized rate of 2-3% and a significant slowdown in the US economy would be inevitable.

Furthermore, once a rise in long-term interest rates caused the bubble to burst, the possibility cannot be denied that house prices will slip into a downward spiral. If house prices fall by around 25% and settle at the "appropriate level", the growth of real consumer spending would inevitably see a sharp fall and the US economy would be dealt a severe blow. By contrast, to keep the growth of nominal consumer spending at a cruising speed of around +6%, the annual rate of decline in house prices would have to be no more than around 4%.

For the next few years, the US authorities will need to exercise greater caution and mobility than ever before in policy management if a gentle adjustment in house prices is to be achieved. The trend of house prices in the United States is an important factor in determining the trend of the US economy, and also has a major influence on the trend of the Japanese economy. Moreover, because achieving a soft landing in house prices is an issue for all developed nations, and one for which policy methods have yet to be established, the approach taken by the US authorities, and its consequences, will be a focus of attention.

For more information on the content of this report, please contact: Ikuo Masuda the Japan Research Institute, Limited.

Tel: 03-3288-5017
E-mail：masuda.ikuo@jri.co.jp

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