WASHINGTON -- Much of the appreciation of U.S. home prices during the current boom is attributable to fundamentals, making a drop in prices unlikely, the International Monetary Fund said in a study released Wednesday.
The duration and strength of the current home-price boom in many industrial countries has led some economists to fear that rising interest rates might trigger sharp declines in prices and hurt consumer confidence and spending. In an essay from its latest World Economic Outlook, IMF researchers said that is less of a risk for the U.S. but more of a concern for Australia, Ireland, Spain and the U.K.
To defuse the danger of a housing-price bust, the IMF said central bankers in these countries should aim for a slow, gradual tightening of interest rates, a strategy now pursued by the Federal Reserve and the Bank of England.
"The growth rate in U.S. house prices is projected to slow down over the coming year and a half," the IMF said. "This slowdown is primarily due to the rise in long-term interest rates expected by the futures markets...This analysis, however does not find compelling evidence suggesting that a real house-price drop is in the offing."
The benign forecast for the U.S. is particularly good news for the global economy, because the IMF study also found that home-price booms and busts tend to be synchronized around the world, with U.S. economic activity and interest rates being a strong driver of trends.
Nonetheless, the IMF said several other countries which have experienced greater home-price appreciation can't rule out a price drop.
"In cases where house prices may have exceeded fundamentals, which may include Australia, Ireland, Spain and the U.K, ...there is a danger that higher interest rates could trigger a much larger downward adjustment in house prices, with considerably more severe consequences for real activity," the IMF said.
Policymakers should consider tightening lending requirements and strengthening banking supervision in countries where household debt is high, the IMF said.
In the longer term, governments should reform bankruptcy laws and accounting rules where necessary to encourage development of mortgage markets, the IMF said. The IMF noted that countries with predominantly fixed-rate mortgages have better behaved housing prices and fewer negative spillover effects on their economies.
Finally, the IMF said governments should "assess the extent and desirability of their implicit/explicit guarantees to mortgage debt."
For over a year, regular IMF reviews of the U.S. economy have called for tighter regulation of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). One of the benefits included in the federal charter of these government-sponsored enterprises is U.S. Treasury credit lines.
