Housing cycles and their impact on the financial system and the macroeconomy have become the center of attention following the global financial crisis. This paper documents the characteristics of housing cycles in a large set of countries and examines the determinants of house price movements. Empirical analysis shows that house price dynamics are mostly driven by income and demographics but fluctuations in these fundamentals and credit conditions can create deviations from the implied equilibrium path. We conclude with a discussion of the macroeconomic implications of house price corrections. After the tech bubble burst in 2000, rising property prices, which in retrospect appear to be an unsustainable boom, helped to prop the global economy. Never before had real house prices risen so fast, for so long, and in so many countries at the same time (Figure 1). With the exception of Germany and Japan, real house prices in all OECD countries increased, in most cases, substantially, from 2000 to 2006. A similar yet not as striking increase, with a few exceptions, was recorded in developing countries. House prices rose 50 percent in real terms in the median advanced economy during this period while they were up by almost 30 percent in the median developing country. Nevertheless, as some had been predicting for quite some time, what went up had to come down. When the global housing boom turned into a housing bust during 2007 in almost all countries except the United States, where a housing correction has been underway since 2006, the world economy found itself in what many labels as the biggest crisis of the post-World War II era.

This paper documents the magnitude and characteristics of this global housing boom-bust and examines the impact of house price corrections on the overall economy. The analysis is conducted in an international sample covering both developed and developing countries and complemented by exercises at the sub-national level using data for the United States. To give a sense of the usefulness of the analyses in real-time, the data cut-off is applied at the end-2009. The findings suggest that long-run price dynamics are mostly driven by local fundamentals such as income and population growth. The effect of more globally connected factors such as interest rates appears to be less strong. Credit market conditions may cause short-run deviations from long-run equilibrium and, ultimately, when the correction starts, as it did in the most recent episode, financial stability and the overall economy bear important consequences in terms of credit institutions coming under stress and slowing real economic activity. The severity of the ultimate impact depends on various factors including structural characteristics of housing and mortgage markets.