Not all housing cycles (booms and busts) are alike. Some are deeper, some are longer. Some seem to sail through the economy effortlessly, while others leave a wake of destruction.
Carmen Reinhart and Kenneth Rogoff (U of Maryland and Harvard respectively) conducted extensive research on historical booms and busts – particularly real estate cycles. (Complete overview of their research in the abstract below.)
They found that the average housing decline was -35.5% and ranged anywhere from -5% to -50%. Because of the relative inefficiency of the housing market, declines on average lasted a long 6 years.
While emerging markets, such as Indonesia, have sharp and short corrections, Japan’s experience is perhaps the most painful. With the Japanese property market in its 17th year of decline, Japanese home owners are left with little but hope and face.
However, the relatively shallow correction of the US during the Great Depression provides hope to those riding a housing bubble.
The Canadian housing boom moving through 2010 doesn’t have the same ferocity as the US boom that ended in 2006. Consequently, it would be reasonable to expect Canadian housing declines – assuming the occur – to be more tame.
THE AFTERMATH OF FINANCIAL CRISES
Carmen M. Reinhart & Kenneth S. Rogoff
Abstract
This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends
to explode, rising an average of 86 percent in the major post–World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.
Click image for complete research
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Read More:
Get the Double-Scoop on Real Estate
What Could a Canadian Housing Bust Look Like?
Does Your City Have the Most Expensive Real Estate?
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