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Opinion

Is the price boom set to bust?

Current data suggest a gradual tailing off of the house price boom is likely in OECD countries. But there's still room for a sharp decline that could fuel recession and have a serious impact on overstretched banking systems and agency lenders.

Is the long run of house price increases in the OECD over and set for a sharp decline? In the UK and the US, where the boom has been strongest, the debate rolls on. Every week, a report emerges predicting a 30% to 40% fall in prices within a year. Then another says any slowdown will be gentle. Which is correct?

The boom has been strong and synchronized. After discounting general inflation, house prices have risen on average 80% to 100% in several countries over 10 years.

US and Australian prices have never been higher relative to household income. When measured against rental values, prices are also at record levels for all countries.

That looks like a bubble. But house prices have risen steadily for 30 years in most countries (bar Japan and Germany). That suggests structural factors support rising prices.

First, demand for housing has risen across the OECD as family units get smaller. Then there is supply. In countries with high population densities such as the Netherlands and the UK where building land is scarce, it has not been possible to build new houses to meet demand, raising the price of existing stock.

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