Dream House No More?

BRUSSELS – The financial crisis that began in 2007 had its roots in excesses in the housing market that remained unresolved in 2010 – and that will continue to roil economies in 2011 and beyond. Everybody now knows about America’s dodgy “sub-prime” mortgages (the term says it all). But it is all too easy to forget that the development of this market was initially welcomed, because it enabled even people who would not normally qualify for a mortgage loan to aspire to homeownership. Sub-prime mortgages made the American dream come true.

Of course, billions of others around the world share the same dream. But the way housing finance is organized differs enormously from country to country, and these differences explain the recent global imbalances and financial crashes.

In developed economies, construction can add only a relatively small amount each year to the existing stock of housing. With populations stagnating (or declining in many parts of Europe and Japan), the existing stock of housing is exchanged among different parts of the population, and typically bequeathed from old to young.

The situation is different in emerging economies, where the quantity and quality of the existing stock of housing is woefully inadequate. Moreover, most of the existing housing tends to be in rural areas, whereas most of the jobs are in the cities. This is why urbanization means a huge building boom in emerging economies. China, as usual, is the most extreme example, now accounting for more than one-half of global cement consumption.