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S the u.k ireland and spain the recovery also seems

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Unformatted text preview: S., the U.K., Ireland, and Spain. The recovery also seems to be proceeding at different speeds across the globe. In sharp contrast with the slow recovery in house prices in the United States (+4.5% in 2010.Q1 compared to a year earlier) or the declines in Ireland (-11.0%) and Spain (-4.7%), Singapore (+38%), Hong Kong (+28%), Australia (+20%), South Africa (+15%), and China (+12%) have all seen strong growth. Even Britain has seen increases in house prices of nearly 9% over the last year, reversing the bust. Based on historical price-rent ratios, this latest run-up leaves house prices at elevated levels relative to rents in several countries. The Economist calculates “over- valuation” as of August 2010 of 61% in Australia, 54% in Hong Kong, and 34% in Britain, causing concerns of froth in these housing markets. In response, Australia, Singapore, Hong Kong, and China have raised interest rates or have tightened borrowing requirements. In contrast, house prices-to-rent ratios in the United States are 6.5% below their long-term average. Japan never recovered from the real estate bubble of 1989, and its housing is now 35% cheaper than the historical average. Table 7-3. House Price Boom and Bust Across Countries 1996.Q1 = 100 Peak Trough Current (2010.Q2) Ireland 420 (2007.Q1) 275 (2010.Q2) 275 Britain 350 (2007.Q4) 290 (2009.Q1) 325 Spain 310 (2008.Q1) 275 (2010.Q2) 275 Australia 290 (2008.Q1) 275 (2009.Q1) 340 Denmark 270 (2007.Q3) 220 (2009.Q2) 225 France 255 (2008.Q1) 235 (2009.Q2) 240 United States 240 (2006.Q2) 160 (2009.Q1) 165 Canada 170 (2008.Q2) 160 (2009.Q2) 165 Japan 100 (1996.Q1) 60 (2010.Q2) 60 Source: The Economist What are the contributing factors to this cross-country variation in the boom-bust pattern and subsequent recovery? 97 Mortgage credit growth was perhaps the important facilitator of fast house price appreciation during the boom. There was rapid growth in the ratio of mortgage debt to GDP between 1998 and 2008 in many countries: 53% in Ireland, 38% in Spain and in the Netherlands, 30% in the U.K., but only 16% in France, 12% in Italy, and even -6% in Germany. As in the U.S., houses prices rose much faster than did incomes in Spain, Ireland, the U.K., New Zealand, and even France, forcing households to increase their debt levels to afford housing. With 1996 as a benchmark year (100), the house price to average income ratio climbed to 270 in Ireland, 200 in New Zealand, 170 in Spain, 160 in Australia, 150 in Japan, and 130 in the United States. Germany is the exception, with house prices falling 20% compared to income between 2004 and 2009. The deterioration of lending standards was another significant factor. We discussed this phenomenon in the U.S. in detail in Chapter 3. No other country saw a comparable slide in the quality of mortgages that were issued. The main reason is that the subprime market did not develop to the same extent in other countries, due to stricter regulation of the financial sector and its better enforcement, 51 the absence of a formal government mandate to encourage...
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S the U.K Ireland and Spain The recovery also seems to be...

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