VANCOUVER -- The United States real estate market has entered a period of "unprecedented volatility," and banks, insurance providers, and government housing agencies should brace for global ripple effects, Yale economist and author Robert Shiller told a conference yesterday.
"There is a serious risk of worldwide recession coming up in the next couple of years because of the turning of the real estate market," said Mr. Shiller, speaking at the annual congress of the International Union for Housing Finance (IUHF) in Vancouver.
"And housing finance people should be thinking creatively now about what to do about this," Mr. Shiller added.
While some pundits for years have been warning that global real estate prices have been rising too high, too quickly, fears of a bubble proved largely overblown in cities such as London and Sydney over the past couple of years.
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But with prices falling and homes taking longer to sell, the U.S. is the country that shows the most signs of being at a turning point, he said.
Mr. Shiller is perhaps best known as the author of Irrational Exuberance, a book published in 2000 that predicted the bursting of the stock market bubble. He went on later to warn that a similar bubble could emerge in housing.
He is also chief economist for MacroMarkets LLC, a company that designs financial instruments aimed at providing a hedge against real estate risk.
One of the firm's innovations is housing futures and options for 10 major U.S. cities traded on the Chicago Mercantile Exchange. The products allow investors to buy and sell housing futures and options in the same way they would invest in other commodities such as soybeans or coffee, with the idea of hedging against risk -- for example, by going short in one city and long in another, based on the cities' prospective economic outlooks.
Consumers and institutions should consider such instruments as a means of protecting themselves against volatility that shows no signs of decreasing, Mr. Shiller said.
Real estate price swings used to be local phenomena, he added, restricted to cities or regions. Now, such movements can affect entire countries and, in the case of the U.S., where the value of residential real estate held by households and non-profit organizations was an estimated $21.6-trillion at the end of 2005, influence the economies of other nations. While he mentioned no other countries by name, Canada is the largest U.S. trading partner.
Asked how he saw a housing crash in the U.S. playing out to a worldwide recession, Mr. Shiller said declining consumer confidence would likely be a key factor.
At the moment, a common real estate story nearly worldwide is that of the neighbour who sold their house for well above asking price, generating 'can you believe it?' shakes of the head and a comforting impression that prices can only continue their steady climb, Mr. Shiller said.
"If the new story is that 'our neighbour thought his house would sell for $1-million but he couldn't sell it for $600,000,' then that would be a big hit to confidence," he said.
Lower confidence translates into lower demand for home furnishings, construction materials and, in the worst case, interest rate cuts meant to stimulate demand but which have little effect as consumers sit on their wallets, he added.
"That's [U.S. States Federal Reserve Board chairman] Ben Bernanke's worst fear -- that you cut interest rates to zero and hit a liquidity trap," Mr. Shiller said, adding that is a possibility, not a prediction.
Delegates from more than 40 countries have registered to attend this week's IUHF congress, being held in Vancouver this year for the first time since 1914.
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