Press Release Economic Growth Europe

English Central Bank Warns of Housing Bubble – Greenspan Does Not Follow Lead

June 15, 2004

Contact: Karen Conner, (202) 293-5380 x117Mail_Outline

June 2004

English Central Bank Warns of Housing Bubble

Greenspan Does Not Follow Lead

For Immediate Release: June 2004

Contact: Dean Baker, 202-332-5218
             Mark Weisbrot, 202-746-7264

In a public speech yesterday, Mervyn King, the governor of the Bank of England, warned that housing prices in England are "well above what most people would regard as sustainable in the longer term." He later added that homebuyers should be aware that house prices could move down as well as up. With these comments, Mr. King sought to challenge the psychology that has pushed the average house price in England close to $300,000.

Mr. King's honesty could set an example for the actions that Alan Greenspan could take to contain the housing bubble in the United States before it grows to even more dangerous levels. While home prices ordinarily increase at approximately the same pace as the rate of inflation, over the last eight years, the run-up in housing prices has exceeded the overall rate of inflation by more than 40 percentage points. This run-up has created more than $3 trillion in bubble wealth in the housing market; paper wealth that would disappear if home prices fell back to their normal relationship with other prices (including rents).

Mr. Greenspan, who for years refused to comment on the growth of the stock bubble, has actually tried to claim that there is no housing bubble. His comments on this issue have probably helped to foster the growth of the bubble. By contrast, if he follows the example of Mervyn King, and publicly lays out the evidence for a housing bubble, it is likely to limit the damage that the inevitable correction will cause.

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