Twin peaks in equity and housing prices? - BIS Quarterly Review, part 7, March 2004

Some three years after the global bust in equity markets, and despite a weak economic backdrop, housing prices have continued to rise in many countries. This remarkable buoyancy seems rather unusual by past experience and raises questions about the sustainability of current trends. Could housing prices falter any time soon? And if they do, could large declines be in store? Answers to these questions are particularly important at the current juncture, as the strength of housing markets has been a significant factor helping to cushion the slowdown in global economic activity that started in the autumn of 2000 and to underpin the subsequent recovery (BIS (2003)). To cast light on these issues, we examine the evolution of housing prices in a sample of 13 industrial countries since the early 1970s in search of statistical regularities that might help us chart the future. We ask three questions. First, how often have major equity price peaks been followed by housing price peaks? Second, when they have, what has been the lag and what factors have affected it? Finally, what has determined the size of the subsequent fall in housing prices? Methodologically, our analysis complements existing work in at least two ways. It focuses squarely on the relationship between housing and equity markets, the two asset classes that make up the bulk of private sector wealth. In addition, it pays particular attention to “extreme events”, in the form of major peaks and troughs in the prices of these two assets, the associated booms and busts, and their link to unusually large fluctuations in credit. By contrast, much of the existing work analyses the average or typical relationship between