Survey_AADKM_2005

Abstract

Our full sample extends back to 1970 and so covers the high inflation period of the 1970s and early 1980s as well as the relatively low inflation period since about 1985. As we note below, many countries deregulated their mortgage markets during the early to mid-1980s. As a check on the robustness of our findings across these very different periods, we examine the behavior of indicators around house price peaks in the pre-1985 period and in the period from 1985 onward (post-1985) separately. For most indicators, the results for the pre-1985 and post1985 samples are broadly similar. Perhaps not surprisingly, the largest differences between our two subsamples are in the behavior of median inflation and nominal policy interest rates. Whether these differences reflect changes in the behavior of inflation and policy rates around house price peaks or around business cycle peaks is not clear, however, given the close association between real house prices and economic performance. Inflation: The behavior of median CPI inflation across our two subsamples, shown as the solid red lines in chart 3.12, appears noticeably different. During house price booms in the pre1985 period, inflation at first declined from very high rates and then increased a year or so before the house price peak. In the post-1985 period, in contrast, inflation appears to trend sideways during the house price run-up. In both the pre-1985 and the post-1985 samples, the downturn in house prices is associated with declines in inflation that begin one or two years after the house price peak. Nominal policy interest rates: In both the pre-1985 and post-1985 samples, the early stages of house price booms take place against a backdrop of reductions in policy interest rates. Policy rates then begin to move up. The hikes in the policy rate come later and are much larger in the pre-1985 case, as central banks react to the sharp upturn in inflation, than in the post-1985 case. In the aftermath of the peaks, when house prices are falling, central banks appear to have cut policy rates more quickly and sharply in the post-1985 era than in the earlier period.