Running on empty

A RARE international perspective on the housing boom comes in today’s Financial Times. An analysis starts with the problems in the market in the United States, where prices are falling in many areas and sales of new homes have slumped, and then looks at the situation around the world. It quotes Alan Greenspan, former head of the US Federal Reserve, as saying low interest rates were not responsible for the boom:

‘I don’t think the boom came from a 1 per cent Fed funds rate or from the Fed’s easing. It came from the collapse of the Berlin Wall.’ The end of communism had ‘brought billions of cheap labourers on to the scene. This was highly disinflationary. Bond yields fell, real interest rates fell and real asset prices, like house prices, rose dramatically.’

The (very tentative) conclusion? Despite the soft landings seen so far in Britain and Australia, there are no guarantees that the US will not see a much sharper correction. Especially as, unlike here, construction of new homes boomed as well as prices.