Bank for International Settlements – Annual Report

Asset prices have played a prominent role in the present business cycle, both in terms of the amplitude of their fluctuations and because of their impact on financial institutions and economic activity. Such medium-term swings are of course not new; the last similar episode took place in the early 1970s. What has drawn attention to the recent asset price movements is not only their absolute size and geographical compass; it is also the fact that the prolonged upswing, in contrast to the previous one, occurred against a background of positive inflation-adjusted interest rates. An examination of the two episodes suggests that the distinguishing characteristic of the recent experience has been the ample availability of credit in the wake of market-driven and policy-determined structural changes in the financial industry. While a large number of countries experienced a cycle in real aggregate asset prices over the last ten years, the severity of asset price inflation and deflation varied widely. The sharpest movements occurred in some of the Nordic countries and in Japan. In Sweden and Finland, for example, asset prices increased by over 200% in real terms between 1980 and 1989, only to have a substantial part of the rise reversed in the last three years. Norway also experienced large fluctuations, though not quite as pronounced. In the United Kingdom the upswing can be traced back to the mid-1970s: an increase of around 150% from trough to peak was only moderately affected by the recession in the early 1980s. Asset price swings in other countries, notably Australia, have also been steep relative to their own past experience and have had serious effects on the financial system and the economy. In some respects asset price movements since the early 1980s resemble those in the early to mid-1970s. Large asset price fluctuations occurred during both periods, although their amplitude was generally greater in the 1980s. Moreover, major swings took place around business cycle peaks, in sharp contrast to the experience of the business cycle around the end of the 1970s. Nevertheless, a number of differences are also apparent. First, in many countries asset price increases in the early 1970s generally occurred over a much shorter period – two to three years at most compared with over twice that in the 1980s. Secondly, movements in the early 1970s were dominated in most countries by increases in equity as opposed to real estate Reserve Bank of …