An article in the latest edition of IMF’s Finance & Development magazine offers a historical perspective on housing prices and explores the causes of boom-and-bust cycles in the housing market.

From the article titled Housing Prices: More Room to Fall?:

“IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood.
As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade. Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006). When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment.Indeed, viewed over the long course of history, the distinctive feature of house prices in Herengracht has been not the trend but the cycles (see Chart 1): innovations and good times raised the price for years at a time and—seemingly just when the conviction had taken root that this time would be different—shocks came along to knock prices back down.Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices. House prices soared in the United States, fueled by innovations in housing finance. They also rose in Ireland, coinciding with a historic growth surge; in Spain and Australia, buoyed by immigration; and in Iceland as part of a boom induced by a tremendous expansion in the country’s financial sector. In 2006, house prices started to fall, first in the United States nd then elsewhere (see Chart 2).”

Can house prices fall further?

According to the author Prakash Loungani, house prices in many countries have more room to fall.

The author offers the following three points to support his conclusion:

• Housing prices in many countries still remain above the early 2000 levels
• House prices remain above rents and income
• The recent corrections in many markets have still not erased the excessive run up in prices during 2000-06