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16 Feb, 2022 11:03

US housing bubble about to burst, leading economist warns

Higher interest rates could trigger collapse
US housing bubble about to burst, leading economist warns

The US real estate market could crash this year, leading economist Desmond Lachman predicted in an interview with Nikkei Asia on Tuesday. Adjusted for inflation, house prices in America are now higher than they were 15 years ago, before the last housing bust, he added.

Lachman, a senior fellow at the American Enterprise Institute and former deputy director at the International Monetary Fund, explained that last year the US government was buying large quantities of bonds, which created an equity price bubble, and led to “equity valuations at levels only seen once before in the last hundred years.”

According to Lachman, the trigger for the real estate market collapse would be a hike in interest rates, which is expected to be introduced by the US Federal Reserve in March in an attempt to curb soaring inflation.

Those bubbles in the equity and the housing markets, they’ve been premised on the assumption that interest rates would stay low forever. So, as soon as the Fed starts raising interest rates in an aggressive way, there’s the real risk that it bursts the asset price bubbles and that could, then, move us into a recession,” Lachman said.

Last time the housing bubble burst in the US in 2008, the country was plunged into the so-called Great Recession. The stock market and housing crash were caused by the unprecedented growth of the subprime mortgage market as lenders Fannie Mae and Freddie Mac made home loans accessible to borrowers with low credit scores. By the fall of 2008, high numbers of borrowers were defaulting on subprime mortgages, causing turmoil in the financial markets, the collapse of the stock market, and the Great Recession.

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