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Low Risk of a Housing Correction

Low risk of a U.S. housing correction

Sales and prices are moving so quickly that appraisals are not keeping up. If the appraisal doesn't match the contract price, the buyer doesn't get the mortgage, and the deal dies.

New research from JPMorgan examining historic data found that the risk of a dramatic decline in prices is low, despite current fears of a correction in the U.S. and Canada.

Using data from 14 developed countries dating back to 1950, JPMorgan's research found that sharp price corrections have been relatively uncommon, even following large price increases.

"The data show that sustained increases in real house prices have been the norm rather than the exception in the post-World War II era, as rising populations and incomes have pushed up land prices," Jesse Edgerton, U.S. analyst from the investment bank's economic and policy research team, said in the report entitled "Quantifying housing correction risk in Canada and the U.S." 

"Of course, there have been occasional large price declines over multi-year periods, as we saw starting in 2006 in the U.S. But such declines have not been common, even after periods of rising prices," he said, adding that the chance of a decline in prices was low.

"Simple models based on these data put the chance of a 20 percent decline in real prices within the next five years (roughly equivalent to a 10 percent decline in nominal prices) at about 20 percent in Canada and 10 percent in the U.S."

The research comes as fears grow over a housing bubble forming in the West, particularly in countries like the U.S., Canada and Australia. Since the beginning of the global housing boom around the year 2000, real U.S. housing prices are up 29 percent and Canadian prices up 138 percent, Edgerton noted.

"Nominal house prices in the U.S. have now surpassed their 2006 peaks, while Canadian prices are up 95 percent since then," he said.

"These impressive increases have stoked a long-running debate about the sustainability of Canadian house prices, and similar rumblings are beginning again in the U.S. as well. Defenders claim that price increases result from rising incomes encountering supply constraints in desirable areas, while skeptics see a bubble with significant risk of popping."

The research examined historical data on house prices to put some numbers on the probability of a sharp decline in the coming years.

It also combined price data from the OECD (Organization for Economic Co-operation and Development) with a dataset of historical prices from a recent academic paper on global house prices between 1870 and 2012 which was published in the journal American Economic Review in 2017.

Edgerton said that post-war data illustrated that even rapid price increases do not mean that a correction is inevitable but he cautioned against discounting a correction.

"There have been many occasions where prices rose rapidly only to stabilize or keep going up. But we also know that sharp multi-year corrections are a possibility, as they have occurred at some point in most countries in the dataset." Decreases across the 14 countries surveyed over a five-year period have not been uncommon, Edgerton said, occurring about 30 percent of the time. "But most of these have been relatively modest. A real price decline of 20 percent or more over five years has occurred only about 7 percent of the time."


Source CNBC

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