Saturday, August 05, 2006

The Madness of Crowds

In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple, and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity.

The one constant in this world is human nature.

Friday, August 04, 2006

A Must Read Study Study of International Housing Markets

Between 1979 and 1995 house prices in Ireland did not rise in real terms. House prices in Germany have fallen for twenty five years, in New Zealand for thirty years and in Japan, The US and Australia prices have fallen in real terms for 35 years. These and other fascinating facts can be found in a US Federal Reserve Study of international housing markets.

We find that real house prices are pro-cyclical and tend to reach a maximum near business cycle peaks, often after a prolonged period of buoyant growth in activity has raised output above its potential level and inflation pressures have begun to emerge. Subsequently, real house prices fall for about five years and their previous run-up is largely reversed. Real GDP growth slows during the first year or so after house prices peak as do growth rates of private consumption and investment.

House price booms are typically preceded by a period of easing monetary policy with rates bottoming out about three years before house prices peak. Rates then reverse quickly (after the peak) in response to falling GDP growth

House Prices and Monetary Policy: A Cross-Country Study1. The 65-page treatise covers 35 years and housing cycles in 18 different countries including Ireland.