The IMF’s World Economic Outlook differentiates Real Estate Bubbles that are preceded by run ups in household debt from those that do not.
- Housing busts preceded by larger run-ups in gross household debt are associated with deeper slumps, weaker recoveries, and more pronounced household deleveraging.
- The declines in household consumption and real GDP are substantially larger, unemployment rises more, and the reduction in economic activity persists for at least five years.
- Absent real estate drops, a similar pattern holds for recessions more generally: recessions preceded by larger increases in household debt are more severe.
- In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income
Rapid deregulation substantially encouraged competition for customers, which, in combination with strong tax incentives to invest in housing and optimism regarding asset values, led to a household debt boom in these economies.
Booms in house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households’ growing exposure to a sharp fall in asset prices
Naturally, they do not mention easy credit policies by central banks. It’s not like Central Banks control the amount of debt through the manipulation of the quantity and price in the system. ~ HS
We define a “large” increase in debt as an increase above the median of all busts. The median is an increase of 6.7 percentage points of household income over the three years leading up to the bust, but there is a wide variation in the size of the increase.
For example, the household debt-to-income ratio rose by 17 percentage points during the period leading up to the U.K. housing bust of 1989 and by 68 percentage points before the Irish housing bust of 2006.
The fall in real house prices is 10.8 percentage points larger in the high-debt busts than in the low-debt busts.
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