While housing was a major engine of growth in many countries during the first half of the decade, its collapse lay at the heart of the Great Financial Crisis for countries like the United States, UK, Spain, and Ireland. Looking forward, even moderate improvements in the housing market will provide a significant boost to the global economy.

Meanwhile, policies remained supportive and production indicators continued to improve, lending some hope that the rise in unemployment will continue to moderate.

Housing’s rise and fall

• Before souring in 2006, new home starts in the United States rose to a 35-year high of 2.3 million units annualized in January of that year.  Home prices in July of 2006 were up 106 percent since 2000, and had risen in every month but one since the start of the decade.


• New home construction in Ireland skyrocketed 139 percent from January of 2003 to its peak in November of 2006.


• From 2005 through 2007, UK home prices rose 24 percent, and housing starts increased 15 percent from the first quarter of 2005 to the first quarter of 2006.

The ensuing fall has been precipitous, with trouble first hitting the United States and then spreading around the globe.

• At its low point in 2009, the average U.S. home price had fallen 33 percent from its peak, while construction and sales collapsed by 80 percent and 76 percent, respectively.  Residential investment, which made up over 6 percent of GDP in 2005, fell to only 2.4 percent in the second quarter of 2009. 

• New dwelling construction in Japan fell by 48 percent from June to August in 2007.


• Housing starts in the UK dropped by 66 percent from the first quarter of 2006 to the last quarter of 2008. 


• Irish home values are still falling, having decreased 23 percent as of the first quarter of 2009.  Home construction reached a 14-year low in June.


• In the year to June, home prices fell by an average of 6.2 percent in 19 countries tracked by the Economist, with 17 of the countries registering declines. Switzerland experienced the highest increase (4.6 percent), while Singapore (-24.9 percent), Denmark (-15 percent), and the United States (-14.9 percent) experienced the largest declines.

Housing improvement likely to be gradual

Despite improvements in the global housing market since the middle of 2009, a strong recovery, especially in the United States, appears unlikely.

• Compared to their lows earlier this year, U.S. sales are up 30 percent, construction 25 percent, and prices 4 percent after a 1.2 percent (m/m) increase in July, the biggest jump in almost four years.  These measures remain well below their peaks, but after serving as a large drag on GDP, residential investment will likely provide a significant boost to growth even if it improves only moderately.


• U.K. housing prices have risen for three straight months, gaining 2 percent since April.  Housing starts in England jumped 63 percent (q/q) in the second quarter of 2009.


• Permits issued for dwelling construction in Germany were up 52 percent in July from lows in January and have nearly recovered to 2008 levels.

A mixed picture on consumer confidence levels

Increasing consumer confidence in Europe will strengthen the housing market, but rising unemployment in the United States suggests that recent improvements in demand are unlikely to accelerate.

• Consumer confidence in the euro zone rose to -19 from -22 in August, reaching its highest level since September 2008. Consumer confidence in the UK surged to -16 in September from -25 in August, marking its biggest jump since 1995.


• The National Association of Realtors’ index of signed purchase agreements, a leading indicator of housing demand, rose 6.4 percent in August, the seventh gain in a row.


• The average 15-year fixed mortgage rate continued to fall, reaching 4.34 percent last week, the lowest level ever recorded by the Mortgage Bankers Association.


• However, the U.S. unemployment rate rose to 9.8 percent, the highest since 1983, pushing the recession’s total job loss to 7.2 million.


• U.S. consumer confidence unexpectedly declined from 54.5 to 53.1 in September, according to the Conference Board.

In the United States, an oversupply of housing and continuing foreclosures will likely keep the recovery tepid.   

• The U.S. Census estimates August’s housing inventory will last 7.3 months at the current rate of sales, down from 7.6 months in July and an all-time high of over 12 months in January.  Despite this decrease, inventory remains high; during the boom, supply hovered around 4 months worth of sales.


• Foreclosures will add an estimated 7 million homes to the market.


• U.S. vacancy rates also remain at historic highs.   

Nevertheless, housing starts are forecasted to rise modestly, from about 600,000 in 2009 to 800,000 in 2010 (about 40 percent of the pre-crisis peak); as a result, residential investment may add approximately 0.5 percent to GDP in 2010, an important turnaround from the last three years where it subtracted an average of 1 percent from GDP.

Worldwide production continued to improve

• Manufacturing surveys broadly improved in September. The rate of contraction in the Euro zone slowed, as the manufacturing Purchasing Manager’s Index (PMI) increased to 49.3 in September from 48.2 in August. A reading below 50 signifies contraction.


• The U.S. services industry, which makes up almost 90 percent of the economy, expanded in September for the first time in eleven months, as the Institute of Supply Management’s (ISM) non-manufacturing index rose from 48.4 to 50.9.  Europe’s services PMI also improved, rising from 50.6 to 50.9. 


• U.S. manufacturing expanded in September, but at a slower pace than in August as the ISM’s PMI decreased from 52.9 to 52.6.


• Global equities plunged after rising unemployment raised concerns about the strength of the recovery.  Major indices in the United States fell by between 1.8 percent and 2 percent during the week.


• The IMF released new forecasts last week, predicting the global economy will expand 3.1 percent in 2010, more than the July forecast of 2.5 percent.  

Support from policy continued

• To boost domestic demand and help their economies recover, central banks in Russia, Hungary and Romania each cut their interest rates by 50 basis points to 10 percent, 7.5 percent, and 8 percent, respectively. 

This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Vera Eidelman, Bennett Stancil, and Uri Dadush.