That conclusion is directly contrary to the established policy of most central banks, including the US Federal Reserve, which ignores home prices when they are expanding. In the current credit crisis, which began with problems in the US subprime mortgage market, the Fed has moved aggressively to lower interest rates.
The Fund looked at trends in housing prices and mortgage debt in 17 countries and tried to assess how much of the price changes could be attributed to economic fundamentals, including trends in personal income, demographics and interest rates. It concluded that house prices in the United States in mid-2007 were 11 per cent higher than the fundamentals would justify. But that overvaluation was much lower than in Ireland, where the IMF estimates that house prices were 32 per cent higher than fundamentals would support. The Netherlands, Britain, Australia, France and Norway showed overvaluations of at least 20 per cent.
Mortgage debt has shot up over recent decades in many countries, but there remain sharp variations as some markets make it much harder to borrow or restrict the loan-to-value ratio of mortgage loans. In the US, total mortgage debt as a percentage of gross domestic product more than doubled , going from 34 per cent in 1983 to 45 per cent in 1990 and then to 76 per cent in 2006.
In some countries, however, the increases were much greater. Mortgage indebtedness in the Netherlands hit 98 per cent of GDP, and in Denmark it rose to 101 per cent. In Italy, however, mortgage debt has risen but is still less than 20 per cent of GDP, and in France the figure is just 32 per cent. Perhaps not coincidentally, when the IMF put together an index of mortgage markets, the most liberal in terms of lending standards was the United States, followed by Denmark and the Netherlands.
... contd.
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