Luci Ellis

The Housing Meltdown: Why Did it Happen in the United States?

The crisis enveloping global financial markets since August 2007 was triggered by actual and prospective credit losses on US mortgages. Was the United States just unlucky to have been the first to experience a housing crisis? Or was it inherently more susceptible to one? I examine the limited international evidence available, to ask how the boom-bust cycle in the US housing market differed from elsewhere and what the underlying institutional drivers of these differences were. Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices. Some of these outcomes seem to have been driven by tax, legal and regulatory systems that encouraged households to increase their leverage and permitted lenders to enable that development. Given the institutional background, it may have been that the US housing boom was always more likely to end badly than the booms elsewhere.

Eight Policy Lessons from the US Housing Meltdown

The global financial crisis has generated many lessons for policy makers in the housing sphere, as well as in financial regulation. This paper discusses eight lessons drawn specifically from the United States housing meltdown that triggered the crisis. The housing sector is important for monetary policy and financial stability, highly interconnected with the financial system, and dependent on institutional details that vary widely across countries and through time. Easier and cheaper access to finance does not improve long-run housing affordability; but if credit conditions ease too much and the credit assessment process breaks down, strategic default becomes more likely. That defaults rose so far in the US shows how unusual its housing system is—a fact not revealed in simple aggregate statistics. One element of the US exceptionalism is that housing supply is quite flexible there, and that helped produce the bust.

Where is the Growth Going to Come From

As the mining investment boom turned down and became a drag on growth, the question has often been asked: “Where is the growth going to come from?†Commentators started speaking of a growth “handover†: if mining investment was not going to provide our growth, something else needed to. And for a while, particular non†mining sectors did seem to pick up, to become in turn the new “engine of growth.†However, this article argues that the underlying drivers of growth over the longer term do not depend on external triggers. Instead, they can be found in the “three Ps†– population, participation and productivity.