World Housing Boom May Cool Slowly

From Bloomberg:

Global Housing Boom May Cool Slowly, Avoiding a Crippling Bust

The biggest global housing boom in three decades may end not with a bang, but with an extended whimper that will keep the economy growing.

Markets for dwellings in the U.S., France, Spain, New Zealand and parts of China are coming off the boil as home-price inflation slows in response to higher interest rates. So far, the rise in borrowing costs has been modest, giving builders and buyers time to adjust.

“We’re seeing a cooling-off of the housing market,” says Raghuram Rajan, chief economist at the International Monetary Fund in Washington. “We haven’t seen a bust.”

Housing prices in industrial countries have doubled in real terms in a decade, the Organization for Economic Cooperation and Development estimates, raising the prospect of a quick reversal. If prices ease rather than collapse, the world economic expansion may be able to continue without sustaining too much damage.

“The global economy should remain buoyant,” says Nariman Behravesh, chief economist of Lexington, Massachusetts-based consultant Global Insight Inc. He sees world growth slowing to 3.3 percent next year from 3.8 percent in 2006 as housing cools.
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U.S. home prices were 12.5 percent higher in 2006’s first quarter than they were a year earlier, according to data compiled by the government’s Office of Federal Housing Enterprise Oversight. That was down from 13.3 percent in last year’s fourth quarter, and is the slowest rate of appreciation in more than a year. “We’re right on course for a soft landing in the housing sector,” says David Lereah, chief economist at the National Association of Realtors in Washington.

Historically, just 17 percent of local housing booms in the U.S. go bust, according to data compiled by the Federal Deposit Insurance Corp., a government agency that regulates banks. And that typically occurs only when local regions are under severe economic stress, such as Texas in the mid-1980s after oil prices plunged.

“Busts have been pretty rare,” says Richard Brown, chief economist at the FDIC in Washington. “The most common way for a boom to end is through an extended period of stagnation.”