Double Bubble Trouble? A Brief Look at House Price Inflation

Real Residential House Price Index (HPI) for the United States, 1Q1991 = 100 (Data sources: US Bureau of Labor Statistics and Federal Housing Finance Agency)

(This week’s post is kept very short as I am busy proofreading some of my friends’ enthralling master theses at the moment.)

The last financial crisis was ignited by the bust of the US housing market bubble. And it is argued by many that this bubble was to a large extent caused by too low Fed rates during the beginning of the last decade (see Financial Crisis Inquiry Commission, 2011). Looking at the Real Residential House Price Index for the United States (which I obtained by correcting the official nominal house price index with the consumer price index), one can observe that during the crisis, US real house prices plunged to the levels of 2000 after they had been rapidly climbing for a decade. However, it is also evident that since 2012, real house prices are on a new rally. This means that nominal house prices are growing faster than still stagnant nominal prices for regularly consumed goods and services (which are used to derive the inflation rate). As the Fed once again hesitates to raise its rate in order to fuel inflation and not to stunt fragile economic growth, there is arguably reason to be concerned about the creation of a new housing bubble in the United States.

World HPI
Real house price indices for selected countries, 1Q2000 = 100 (Data sources: National sources, BIS Residential Property Price database, OECD statistics)

The development of real house prices has been quite diverse across different countries. While countries like Spain and Italy have seen a substantial downside correction, France and Japan have experienced a real house price stagnation since the crisis (after coming from different trend paths). Canada’s more-than-15-year-long housing boom was only interrupted shortly and Germany and the UK (at least until the Brexit referendum) have faced rising real house prices during the last three years. Nevertheless, real house price developments in all these countries seem to be upward trending. (In some countries this means that the deterioration of real house prices has come to a halt.)

In the future, looking at house price inflation as a prime example for general asset price inflation, the following questions will be intriguing to ask: Why has asset price inflation been substantially higher than consumer price inflation over the last decades in most countries? Can this development be explained by demographics, rising inequality and/or productivity stagnation? Should central banks pay more attention to asset price inflation? (Do central banks maybe aim for unsustainably high levels of growth and hence help the creation of bubbles?)

For now, one can only hope that none of the aforementioned countries runs into the bust of a second bubble within a decade, as the tool boxes of most central banks and governments are all but empty, with central bank rates at around zero and many governments running huge deficits or facing other immense political challenges.


Financial Crisis Inquiry Commission, & United States. Financial Crisis Inquiry Commission. (2011). The financial crisis inquiry report: Final report of the national commission on the causes of the financial and economic crisis in the United States. PublicAffairs.

written by Jonas



Author: Jonas Send

I share my creative writing - currently working on a novel. I analyse current topics that interest me in opinion pieces and share my research in economic articles.

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