House Price Busts In Credit Crunches Are The Worst Sort

“Over the period 1960 to the present, recessions in advanced countries that are associated with house price busts and credit crunches are slightly longer and deeper than other recessions,” writes the IMF’s Prakash Loungani. “Over the 12 quarters following the onset of a recession, the unemployment rate increases, on average, by 1.5 percentage points. But in recessions associated with house price busts, the increase in unemployment is 3 percentage points,” he notes.

Loungani also has a chart showing that the house price decline this year has been more modest in the U.S. than in countries such as Denmark, New Zealand, the U.K., and Spain, though the price decline has been going on for much longer in the U.S. and it is the cumulative decline from the price peak that is the key determinant of the extent of mortgage defaults.

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Filed under Credit Crisis, Housing Markets

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