[Viewpoint] The 'Giant Step' Targeting the U.S. Housing Price Bubble

Seojun Sik, Professor of Economics at Soongsil University

The U.S. central bank, the Federal Reserve (Fed), has implemented a 'giant step' by raising the benchmark interest rate by 0.75 percentage points. Until recently, a 0.5 percentage point rate hike was considered likely, but the sentiment suddenly reversed. I, who had expected that raising the benchmark interest rate to around 2.0?2.5% would be sufficient for the Fed to achieve its goals, was somewhat taken aback and sought the reasons behind the Fed's tougher stance. While the media explains the high consumer price index increase in the 8% range by citing oil and food prices, I could not understand the sudden shift to a giant step given that frictional factors like war are significant and that recent corporate inventories have surged, indicating little demand pull.

However, after searching for the Fed's recent announcement that the total U.S. housing asset value increased by nearly 20% in the first quarter of this year, reaching an all-time high, I came to accept this explanation. The Case-Shiller Home Price Index, which measures the U.S. housing price bubble, surpassing its pre-global financial crisis peak, is also being discussed. I had already argued in my Asia Economy column dated May 20 last year, titled 'U.S. Rate Hikes May Come Sooner Than Expected,' that rising housing prices are the essence of future Fed rate hikes. Nevertheless, seeing the Fed's subsequent shift in monetary policy direction, I vaguely speculated, 'Now the U.S. housing prices must be stabilizing,' and this misjudgment led to another misjudgment that 'inflation will no longer cause major problems.'

Unlike South Korea, where housing costs account for only about 10% of the consumer price index, in the U.S., they make up an enormous 33%. Excluding factors like oil, raw material prices, and grain prices, which cannot be significantly controlled by interest rate policy, housing costs almost entirely dominate the price index. In an era of mass production where increased demand does not translate into rising commodity prices, U.S. inflation can be equated with rising housing costs due to increasing home prices. Even Jerome Powell, Fed Chair, unusually warned bluntly, "Don't buy a house," immediately after this rate hike, suggesting that eliminating the 'real estate bubble' is both the reason and goal of the giant step.

Ultimately, once again, the global economy has become hostage to U.S. housing prices, as it was before the past financial crisis. Just as a diver ascending too quickly from the deep sea suffers from decompression sickness, the global economy is likely to suffer some ailments due to the rapid short-term interest rate hikes. First, the stock and bond markets will inevitably show greater volatility. In the cryptocurrency market, which had bubble issues, funds are rapidly flowing out, causing severe pain for investors and various related problems. It is regrettable that if the rate hikes had proceeded a bit faster to preemptively control real estate prices, the situation might have been better.

Fed officials' hawkish remarks toward real estate will continue for the time being. Threatening statements that interest rates will be raised further if inflation does not fall, i.e., if housing prices do not decline, are unsettling financial markets but are considered necessary actions to effectively withdraw funds from the housing market. We must closely monitor news about U.S. housing prices for the time being. If housing prices quickly reverse, the benchmark interest rate could be significantly lower than current forecasts. For the sake of the global economy, I pray that U.S. housing prices now turn to a downward trend.

Jun-Sik Seo, Professor of Economics, Soongsil University