History dictates that property prices in major economies are not yet at bottom

Residential property prices in the world’s major economies, which last year were down an average of 5% from 2007, may keep dropping, according to a researcher from the International Monetary Fund.

Corrections in real estate markets so far have not been sufficient to erode the excesses of the peak years, according to Prakash Loungani, an adviser to the International Monetary Fund’s research department.
He believes that property prices in many countries still have room to fall as they are still over valued but he does not name which countries are likely to see more declines.
Writing in the March issue of the IMF’s Finance and Development magazine, he says prices will probably decline further because they remain well above levels seen at the start of the housing boom around 2000 and also because values were higher than rents and income, which serve as long-run anchors on the cost of residential real estate.
Loungani says that between 1970 and the middle of the 1990s, increases in home prices in 18 nations lasted about five years on average, and values climbed 40% after adjusting for inflation.
During that same 25 year span, declines lasted an average of about four years and prices fell about half as much as they rose, the article said. In contrast, the most recent global housing expansion lasted 41 quarters, almost twice as long as average and prices rose three times as much.
‘The ongoing downturn is approaching the duration of past downturns, and the fall in house prices thus far is nearing the amplitude of past downturns. But because prices rose much more sharply than in earlier upturns, their decline might eclipse those observed in the past,’ he says.
‘Though there are some signs of stabilization, the global correction in housing markets continued through 2009. House prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. House prices also remain above rents and incomes, which often serve as long-run anchors for prices,’ he explains.
‘Econometric models show that house prices increased during 2000 to 2006 to a greater degree than can be explained by either short run driving forces or long run relationships. The corrections thus far have not erased all of the excesses generated by the house price increases. That leads to an uncomfortable conclusion: house prices in many countries still have room to fall,’ he concludes.