Home truths

Font Size

Print

Feedback

Email

Discuss

: freely when house prices fall, he says.

When the cash machine stops working

Falling housing wealth might also crimp spending by restricting access to credit. Banks are happier to lend against collateral. For many households, their homes are the only form of wealth they can offer as security. A fall in house values means there is less scope for running down home equity to prop up consumption.

Mr Buiter agrees that this is an important channel through which falling house prices might hurt spending.

His concern is that judgments about the impact of America’s housing bust, including those of a number of senior Fed officials, assume a downward effect from restricted credit over and above what would normally—though erroneously in his view—be the wealth effect. To him, this is double counting the negatives. It means “the Fed may have been convinced to cut rates too fast and too far.”

There is a also a more general point that emerges from Mr Buiter’s paper. Very often there is too much emphasis on the losers from falling house prices and too little on the winners. A fall in house prices is not bad for everybody. In an important sense, a house is much like any other durable good: a fall in prices is a boon for those consumers who have yet to buy one.