Sunday, April 06, 2008

IMF calls for a focus on housing markets

Source: IMF urges greater focus on housing

The IMF is the latest international governing body to encourage central banks to pay greater attention to housing markets when setting interest rates, challenging the view that monetary policy should avoid trying to soften variance in property prices. The IMF’s comments appear in an analytical chapter in the most recent World Economic Outlook which, among other things, suggests that many European countries are becoming increasingly susceptible to a housing market crisis.
The IMF estimates that house prices are 30% above their fair value in Ireland, nearly 30% overvalued in the Netherlands and the United Kingdom and more than 20% overvalued in France. Although the fund found that US house prices were only a little more than 10% overvalued, it noted that the US market was vulnerable to credit conditions, and might overshoot on the way down. In addition, the fund noted significantly increased residential investment in Spain, Denmark, France, Italy, Finland and Belgium. IMF Chief Economist Simon Johnson, in an interview with the Financial Times, noted that “house prices in quite a few countries look overvalued relative to fundamentals.” Whereas the IMF does not forecast a housing price crash in any of these countries, Johnson points out that “asset price correction remains a risk” particularly in the event of a tightening of global credit conditions.
The IMF’s new view of the role policy makers should play with respect to the housing market is in line with that of a growing number of economists, including central bank officials, who think that monetary policies should see to reduce the amplitude of asset price cycles by trying to spot bubbles in the making and “lean against the wind” with policy. However, this policy contrasts with that of Alan Greenspan, the former Federal Reserve chairman, who thought it was difficult to both spot asset price bubbles and imagine raising interest rates sufficiently to stop a bubble from developing. However, new research from the IMF suggests that there appears to be a big “financial accelerator” operating through housing markets in countries with highly sophisticated mortgage lending practices. Additionally, the IMF found a greater link between monetary policy and house prices, but did not go so far as to recommend that central bankers target house prices.

Questions for Discussion
1. The IMF continues to advocate increased government intervention to correct recent financial downturns. Is government intervention the proper remedy?

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