Study Indicates Housing Market Cycles Have Become Longer

[Eddie_George]

One for the HPC geeks:

A statistical analysis of data from 20 industrial countries covering the period 1970 to 2012 suggests housing market pricing cycles—normal, boom and bust phases—have become longer over the last four decades.

The study also found that longer down phases can have dire consequences on national and international economies. While relatively short-lived housing booms tend to deflate, more prolonged booms are likely to spiral out of control. Similarly, compared to short housing busts, longer housing busts are more likely to turn into chronic slumps and, ultimately, lead to severe recessions.

Results of the analysis recently were included in an article in the Journal of Business & Economic Statistics, a professional journal published by the American Statistical Association. The study was conducted by Luca Agnello, University of Palermo (Italy); Vitor Castro, University of Coimbra (Portugal); and Ricardo M. Sousa, University of Minho (Portugal).

Other key study findings include the following:

• Housing price booms and busts—and even normal phases—tend to be longer when the previous cycle, no matter the type, is long.
• Housing price booms are broadly similar in terms of length in European and non-European countries, but pricing busts are typically shorter in European countries.
• There is a positive duration dependence in the housing market price booms of European and non-European countries, while the housing price busts in non-European countries do not seem to be duration dependent.
• The results corroborate the existence of a time-varying duration dependence parameter for housing booms and busts. Housing booms and busts that last fewer than 26 quarters display positive duration dependence, but the same does not hold for older events. For example, when housing booms or busts have a duration shorter than 26 quarters, each additional quarter of duration—on average—increases the likelihood of the end of such stages of the cycle by 4 percentage points. In contrast, for housing booms or busts longer than 26 quarters, each additional quarter of duration raises the likelihood of their end by only 1.76 percentage points. For normal times, no evidence of change-points is found.

The authors conclude the study's findings support preventive policy interventions by governments during periods of boom and bust. A timely counter-cyclical policy response before housing booms and busts reach 26 quarters on average is crucial, they say, for avoiding large and persistent housing price swings and for hastening the return of the housing market cycle to a normal phase.

EDIT- Add source: http://www.amstat.org/newsroom/pressreleases/2015HousingMarketCycles.pdf

Edited May 2, 2015 by Eddie_George

[billybong]

For example, when housing booms or busts have a duration shorter than 26 quarters, each additional quarter of duration—on average—increases the likelihood of the end of such stages of the cycle by 4 percentage points. In contrast, for housing booms or busts longer than 26 quarters, each additional quarter of duration raises the likelihood of their end by only 1.76 percentage points.

So a boom (or bust) 17/18 quarters or about 41/2 years long is 100% certain to end (using 4% compound interest to get to 100% certainty)? If it doesn't end then it just gets increasingly more than 100% certain? although after 26 quarters it gets increasingly more than 100% certain but at a slower rate?

I guess it's helpful to know that.

Some would say that the current UK house price bubble/boom is about 20 years long (80 quarters) especially so in London (some might say it's longer going back to the 1970s) - so at least in London and taking 20 years it must be getting on for nearly 500% certain.

Edited May 1, 2015 by billybong

[Venger]

Forever Gov intervention? Perhaps these 3 Amigos paper-authors have big mortgages. And perhaps there's a limit on hpc-prevention interventions, were the cure ends up being worse than the disease.

The authors conclude the study's findings support preventive policy interventions by governments during periods of boom and bust. A timely counter-cyclical policy response before housing booms and busts reach 26 quarters on average is crucial, they say, for avoiding large and persistent housing price swings and for hastening the return of the housing market cycle to a normal phase.

Ironically, the best place to look for a market to go straight down is in the richest countries. It is there the bias towards optimism is likely to be most acute.

[porca misèria]

Methinks falling interest rates would account for a lot of that. Higher rates amplify the effect of a shock on overstretched borrowers rather more than the capital sum.

[Up the spout]

A way to shorten the cycle, temporarily at least, would be to re-rate council tax. Someone paying taxes on a £190k house is almost definitely paying more, relative to value, than someone paying tax on a £1.5 million house. Council Tax is grossly regressive and unfair. And so is stamp duty, which in effect is a tax on the young. It would make much more sense to replace both of these taxes by applying capital gains tax to home ownership; a tax that would be very easy to calculate and would on be payable when a property is sold, as opposed to bought. 1% of the house value per year would be fair.

And, to be honest, I don't care at all about the 'cash poor, asset rich' grannies who live in £500k houses when we have a housing crisis. They can either pay up or the government takes an interest in 1% of their property every year, to be repaid when it's eventually sold.

[Executive Sadman]

Or bigger. All due to government intervention.

Of course, there will be a massive crash, bigger than all previous crashes combined, someday.