Housing Bubbles Percolate Far From Crises Elsewhere

Housing prices are rising rapidly in Australia, Canada, China, Hong Kong, Israel, Singapore, South Africa and Sweden.

Housing prices are flat—or falling—in Britain, France, Germany, Ireland, Italy and the U.S.

Welcome to the two-speed global economy.

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The skyline of Hong Kong Island and Kowloon.

When most observers talk about a "two-speed economy," they are contrasting slow-growing mature or advanced economies (the U.S., Europe, Japan, etc.) with fast-growing developing or emerging-market economies (China, India, Brazil, etc.). Philip Suttle of the Institute of International Finance, a bankers' association, calls it "a two-and-six world." In mature economies, growth and inflation are at around 2%; in emerging markets both are around 6%. Whenever anything nudges them off that course, he says, something else nudges them back.

But there's another way to divide the world: Some economies had a big banking crisis. Some didn't. And the ones that didn't are the ones where housing prices are shooting up. Slow growth in mature economies is leading them to keep interest rates low and credit conditions easy. Because they (so far) dominate world financial markets, that means global credit is easy, too easy for emerging markets where inflation—in wages, prices and asset prices—is the worry.

"In countries where the financial system was not seriously damaged during the global crisis, housing prices have risen rapidly," says Stanley Fischer, governor of the Bank of Israel. "That's because when interest rates were cut sharply to deal with the crisis, mortgage interest rates also fell rapidly, and people responded by borrowing to buy houses—thereby driving up the price of houses."

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Low rates in the U.S. and other economies hit hard by the financial crisis aren't having the same effect. Their banks aren't yet eager or able to lend readily. In the U.S., for instance, the latest 20-city S&P/Case-Shiller home-price index was 3.1% below year-earlier levels and those year-ago levels were 29% below the 2006 peak. The latest Federal Reserve survey found little evidence that banks are undoing tighter mortgage-lending standards imposed during the worst of the bust.

But elsewhere—particularly in countries flooded with money fleeing super-low interest rates in the U.S., Europe and Japan—banks are lending, people are buying and home prices are climbing. This isn't only an emerging-market phenomenon.

In Canada, for instance, commercial banks were hardly shaken by the crisis but the Bank of Canada has been holding its key rate at just 1% to foster economic growth. The consequence: Housing prices in February were up nearly 9% from year-earlier levels, the Canadian Real Estate Association says. The worry in Canada and elsewhere is that what goes up might come down, and history amply illustrates the economic harm done when housing prices plunge.

In Israel, banks were spared the worst of the crisis; they hadn't invested much in U.S. subprime mortgages. But Israel wasn't immune from shock waves from abroad so its central bank cut rates all the way to 0.5% in 2009. That made mortgages cheap. Over the past year, the house prices are up 16.3%.

"Continued rapid price increases could threaten stability, and in that sense could lead to the creation of a bubble," the Bank of Israel says. Raising rates will make mortgages more costly, and Mr. Fischer has been pursuing that, recently pushing the Israeli central bank's benchmark rate up to 3%.

But like many of his counterparts elsewhere, Mr. Fischer knows a side-effect of higher rates is a stronger currency. And that hits Israel's vibrant export sector. So he is looking for alternatives more targeted on home prices: The Bank of Israel has imposed rules meant to increase the cost of mortgages. So far, they hit only mortgages larger than 800,000 shekels (about $235,000) with down payments below 40%, but there are no signs that the Bank of Israel will stop at that.

In this (and perhaps only in this) respect, Israel isn't unusual. The average house price in Hong Kong rose more than 20% in 2010 following a 30% increase the year before. In the first two months of this year, prices rose another 7%.

"The current abundant liquidity and low interest rates will not last forever. Neither will rising property prices," Financial Secretary John Tsang warned recently. Authorities are pushing lenders to make mortgages harder to get, lifting minimum down payments and imposing taxes of up to 15% on property sales to cool things off. Singapore has done much the same, levying a tax on residential properties held less than three years.

Some big countries had a housing bubble that burst, provoking the biggest financial crisis in half a century. To avoid a depression, they flooded the world with credit. And that credit threatens to create new housing bubbles in other countries. No one ever said globalization was easy.

Write to David Wessel at capital@wsj.com