Leading Economist Warns Of Japan-Style Slump In US

Source : The Electric New Paper, January 03, 2008

Fall in house prices could go on for years

HERE'S the bad news: US real estate values have lost US$1 trillion ($1.44 trillion).

Now, prepare for the worst: That amount could triple over the next few years.

It could represent the biggest threat to the growth in the US, one of the world's leading economists has told TheTimes.


Mr Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: 'American real estate values have already lost around US$1 trillion.

'That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses.'

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,' he said.

BUBBLE SCENARIO

This is a classic bubble scenario, said

Professor Shiller, author of Irrational Exuberance, a phrase later used by MrAlan Greenspan, the former Federal Reserve chairman.

Professor Shiller added: 'A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.'

He said that signs at the beginning of last year that had indicated that some states were beginning to experience a recovery in house prices had proved to be false.

Until two years ago, each of the 50 states in the US had experienced a prolonged housing boom, with properties in some doubling in price.

The reasons are cheap credit and lax lending practices to borrowers who would not have been able to secure a mortgage.

Two years ago, the northeastern states of the US became the first to slide into a recession after 17 successive interest-rate rises between Jun 2004 and Aug 2006 hit the property market.

Last week, new numbers from the S&P/Case Shiller index showed that house prices had declined in October at their fastest rate for more than six years, with homes in Miami losing 12 per cent of their value.