Real home prices in the three nations were undervalued in the mid-1990s but then soared -- thanks to better fundamentals, such as demographics, rising incomes, low real and nominal interest rates, and the health of the nations' economies. The boost to consumers' wealth helped to lift demand.
The Goldman report calculates current home prices in the U.S., Britain, and Australia are overvalued by 10%, 15%, and 29%, respectively. A key reason for the runup was that, as mortgage rates fell, buyers could bid up prices without seeing any significant uptick in their monthly payments.Now rates are rising, and history shows home prices adjust downward -- often by too much, cutting into consumer demand. If long rates rise one percentage point and prices overshoot, the Goldman paper says the drag on U.S. spending would be 2.4%, British demand would slow 1.9%, and Aussie purchases could slip by 3.1%.
On the plus side, notes the study, softer demand would help to rebalance the global economy away from excessive consumer spending, especially in the U.S. But there is a risk that demand could weaken too much at a time when some policymakers may not be able to offset the drag. The U.S. has little ammo left from fiscal or monetary policy. Britain could cut interest rates, but its fiscal budget is in the red. Only Australia has great flexibility because it enjoys an almost-balanced budget and nearly neutral monetary policy.
Bear in mind that soaring home prices are no longer an Anglo trend. The study notes Spain, France, Italy, the Netherlands, and Ireland have all seen big gains in home prices. Even in Japan, where real estate collapsed in the 1990s, prices have stabilized.
Clearly, though, the U.S., Britain, or Australia will first face the challenge of allowing home prices to adjust without disrupting the overall economy. Their successes -- or failures -- will offer guidance for other policymakers around the globe. By James C. Cooper & Kathleen Madigan