Housing Boom, Bust Phases Grow Longer Over Last 40 Years

At lot can happen in four decades, and in the housing markets of industrial countries around the world, more than just demand has changed in the last 40 years.

At lot can happen in four decades, and in the housing markets of industrial countries around the world, more than just demand has changed in this arena over the last 40 years, according to a statistical analysis presented in a recent article in the Journal of Business & Economics Statistics, a professional journal published by the American Statistical Association. What else has changed? The length of the boom and bust phases of the market pricing cycles are different–they’ve grown longer.

Luca Agnello, Vitor Castro and Ricardo M. Sousa–scholars at the University of Palermo in Italy, the University of Coimbra in Portugal and the University of Minho in Portugal, respectively–conducted the study. They analyzed 20 industrialized European and non-European countries, including the U.S., from the first quarter of 1970 to the second quarter of 2012. The scholars’ most notable finding is the fact that housing price booms and busts, and the normal stages in between, in European and non-European countries are all predisposed to lasting for longer periods when the previous cycle, regardless of type, is long.

The researchers also found that in European and non-European countries, housing price booms are similar in length, and in those booms and busts lasting less than 26 quarters, they have a positive duration dependence (increasing hazard function). But that is where the similarities between European and non-European nations end.

Pricing busts are characteristically shorter in European countries, and in non-European countries, price busts appear not to be dependent on duration.

“While relatively short-lived, housing booms tend to deflate, more prolonged booms are likely to spiral out of control,” the scholars conclude. “Similarly, compared to short housing busts, longer housing busts are more likely to turn into chronic slumps and, ultimately, lead to severe recessions.”

However, these outcomes can be influenced. The authors of the research have determined that preventive policy interventions, such as a well-timed counter-cyclical policy response before housing booms and busts linger for 26 quarters, can prevent large enduring swings in housing prices as well as accelerate the cycle’s return to a normal phase.

Perhaps governments should take note. Agnello, Catro and Sousa note, “To the best of our knowledge, our article provides the first assessment of this second dimension of housing price cycles, that is, the existence of breaks or change-points in the duration dependence.”