The economist calculates over valuation as of august

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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?
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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 affordable home ownership, and the small presence (if any) of government-sponsored enterprises in mortgage markets. This may have prevented a U.S.-style race-to-the-bottom. In the aftermath of the crisis, many countries saw a tightening of mortgage lending standards, including countries that saw a smaller deterioration in standards during the run-up. In the U.S., 65% of lenders reported tightening standards, while that number was 80% in the Netherlands. The use of 100% LTV loans and limited documentation loans has essentially disappeared around the globe (both the U.S. and the U.K. featured a significant increase in such loans during the credit boom). The almost complete collapse of private-sector mortgage lending and securitization (in the non-conforming segment) was also unique to the U.S. And while similar to the U.S., the U.K. saw a 30% drop in lending during and right after the crisis,
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