October 01 2013 0Comment

Rising US Home Prices Could Boost World Economy

More than five years after collapsing housing prices and rising levels of distressed properties led to a U.S. financial crisis, properties in some areas are returning to pre-recession values. That may bode well for economies outside of the United States too. Because of the global interconnectedness of finance, an improving housing sector here could be a boon for capital markets across Europe and Asia.  

Rising US Home Prices Could Boost World Economy

In May, average US home prices had returned to spring 2004 levels. New home sales have climbed to a five-year high in June, according to the US Commerce Department.  

“There’s been a sharp turnaround over the last 18 months,” said economist Dean Baker, co-director at the Center for Economic Policy and Research, a Washington DC-based think tank.

It may not be only US homeowners that benefit from the real estate rebound

The shift may also translate into benefits for Denmark, Greece, Argentina, Norway and dozens of other countries in Europe and Asia that experienced similar real estate price collapses after the US decline, say experts.

For example, in Dublin, Ireland, which fared badly during a real estate bust, prices have risen by 8% since last year. In the UK, July housing prices rose 1.9% year-over-year in June, their fastest pace since 2010.

With the housing sector making up a large part of the US economy, housing cycles in America can impact the 
economy on a global level because of the country’s size, said Susan Wachter, professor of real estate and finance at the Wharton School at the University of Pennsylvania 
in Philadelphia.  

The impact of US real estate on the rest of the world is a relatively new phenomenon that came about in the 1990s as global markets became far more intertwined, said Wachter. Nowadays, with real estate assets making up roughly 20% of private wealth and interest rates that are more closely matched set on a global level, real estate cycles around the world have become more correlated.

One key ingredient: the world’s integrated financial sector. As the world’s largest banks, including US-giants JP Morgan Chase & Co and UBS return to profits, homeowners benefit on the margins.

“Their recovery indirectly affects their ability to lend not just in the US, but worldwide,” Wachter said.

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