Britain, where booming house prices followed by a crash and bank lending problems have often mirrored those of the United States, at least on the surface. However, risky loans were typically made by regulated banks like Northern Rock or Bradford and Bingleys whose capital and net worth were at stake, rather than mortgage brokers. Thus, the argument that lenders “with no skin in the game” were the primary cause of the housing and banking crisis would not apply to Britain. House prices in Britain rose 205 percent from 1997 to 2007:q1, exceeding the 178 percent rise in the United States as measured by the Case and Shiller/S&P price index or the 103 percent rise as reported by the OFHEO index.2 (Table 1 reports house price growth for 20 countries over this time period.) As in cities like New York, however, this incredible growth in British housing prices was accompanied by relatively little new construction (home construction grew less than 12 percent between 1996 and 2006). In Spain, house prices grew 184 percent over the same period. The Spanish housing market as described in the second paragraph appears to exhibit many similarities to markets like southern Florida in the US. 3 More than four million dwellings were constructed in the last decade. Even with a growing economy as Spain integrated with the rest of Europe, this construction greatly exceeded demand. As with the UK, these loans were typically originated by regulated banks. Banks are now greatly cutting back on lending as nonperforming loans rise. The Irish housing market exhibited many of the same characteristics as the Spanish market, with home price increases of 251 percent between 1997 and 2007:q1 and growth in new construction of 177 percent between 1996 and 2006.

Almost halfway around the world, Australian house prices exhibited their own boom-bust-boom cycle as described in the third paragraph. House prices across the country rose in the early 2000s as interest rates fell. However, unlike much of the rest of the world, Australian real mortgage rates increased quickly from their floor. Australian house prices stagnated in Sydney, but continued booming in Perth, where rising raw material prices spurred the local economy. As mortgage rates flattened, Australian house prices again started rising. Credit concerns are starting to plague the economy. It is important to understand the global context when considering the housing situation in the United States. Below we examine the behavior of house prices in an attempt to consider the role of interest rates, the mortgage market, and other fundamental factors in explaining the boom-bust cycle of the 2000s. We focus on issues that might be relevant in developing new policy options to help the United States housing market going forward.