NewsMine — economy — united-states — 2004 — 2004-apr-may — Viewing Item

IMF warns housing prices asset bubble { April 23 2004 } Original Source Link: (May no longer be active)    http://www.theaustralian.news.com.au/common/story_page/0,5744,9361936%255E25658,00.html http://www.theaustralian.news.com.au/common/story_page/0,5744,9361936%255E25658,00.html IMF: rate risk to home 'asset bubble' By David Uren April 23, 2004 AUSTRALIA faced the prospect of further interest rate rises, the International Monetary Fund warned yesterday, adding the house price boom was an "asset bubble" destabilising the economy. The IMF warned such housing price declines tended to be protracted and often associated with shrinking economies and financial instability. In its twice-yearly World Economic Outlook, the IMF said global interest rates were very low, and would have to rise. Its review of the Australian economy said interest rate increases may be necessary to keep inflation in check. Low interest rates created a danger that asset prices could get ahead of fundamentals, and that interest rate rises -- especially if abrupt or unexpected -- could lead to financial market volatility. "This is a particular concern in countries with buoyant property markets, including the UK, Australia, Ireland, and Spain, and to a lesser degree the US and New Zealand," it says. The IMF said falling house prices would harm the economy in several ways. It noted new residential property investment had been as high as 1 per cent of Australia's gross domestic product so lower levels would produce lower growth. Lower house prices would leave people feeling less wealthy and result in lower consumption. The IMF's greatest concern was higher rates could combine with falling house prices to pose risks to financial stability. As rates rise, the market value of mortgage loans declines and defaults rise.

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