Sat. Oct 23rd, 2021

House prices are growing in almost every major economy in the wake of the coronavirus pandemic, which has yielded the widest rally for more than two decades and revived economists’ concerns about possible threats to financial stability.

Of the 40 countries covered by OECD data, only three have fallen house prices in real terms in the first three months of this year — the smallest share since the data series began in 2000, analysis by the Financial Times found.

According to analysts, historically low interest rates, savings accumulated during lockouts and a desire for more space than people working at home.

Pandemic drives biggest house price rise for two decades

In the short term, house price growth can ‘be a good thing for the economy, because people who already own homes feel richer and they can spend more because of the valuation of their assets’, says Claudio Borio, head of the monetary and economic division at the Bank for International Settlements, the bank for central banks.

However, if it continues, it could lead to an unsustainable boom that could eventually drive activity “upside down,” especially if accompanied by strong credit expansion, he warned.

Price growth increases

The annual growth rate of house prices in the OECD group of rich countries hit 9.4 percent in the first quarter of 2021 — the fastest pace in 30 years — as economies recovered from last year’s severe coronavirus recessions.

Line chart of the average annual% change (nominal prices) showing that house prices in the OECD are rising sharply

Deniz Igan, deputy head of the macro-finance division in the IMF’s research division, noted the “strong house price growth over the past year in most parts of the northern hemisphere”.

National data suggest that the broad trend continues into the second quarter. In the US, house prices rose at their fastest annual rate in almost 30 years in April.

Strong growth continued among the United Kingdom, South Korea, New Zealand, Canada and Turkey.

Some states are showing signs of ‘housing fever’, according to Enrique Martínez-García, senior research economist at the Federal Reserve Bank of Dallas. He attributes the development to fiscal and monetary stimulation during the pandemic.

Why are prices rising?

“Extremely satisfactory financial conditions” with record-low interest rates helped boost house prices at an extraordinarily rapid pace during a period of weak economic activity, Borio said.

Low borrowing costs make home purchases more affordable compared to rent and other investments.

In addition, many households, especially those who were already better off, accumulated big savings since the onset of the pandemic, as closures limit spending while protecting some jobs.

Slope map showing how mortgage rates have fallen

“A lot of this additional income has been allocated to the housing market,” Martínez-García said.

At the same time, more people decided to move house, often to larger properties in quieter locations, after long hours at home. They are penetrating to real estate markets that were already dealing with an accumulated demand from households that delayed the postponement.

According to Mathias Pleissner, economist at the rating agency Scope Ratings, the situation was exacerbated by a lack of supply and rising building prices. Construction supplies shrank as global supply chains came under pressure, and the cost of materials such as steel, wood and copper rose rapidly.

Brett House, deputy chief economist at Scotiabank in Canada, warned of a structural imbalance between supply and demand[in housing inventory]. . . it’s just going to get hot ”in the coming months.

Line graph of savings as% of disposable income shows Many households in large economies save more

Is it a bubble?

Average house prices in the OECD are growing faster than income, making housing less affordable. They also rise faster than rents.

Adam Slater, chief economist at Oxford Economics, said properties in advanced economies were about 10 percent overvalued compared to long-term trends. This makes this boom one of the largest since 1900, he calculated — though not as great as the run-up to the financial crisis.

Global house prices: raising the roof

House prices are rising in very large economies – but is it sustainable?

Part 1: How the pandemic caused the biggest global boost price for more than two decades.

Part 2: Buyers are flocking to smaller U.S. cities, renewing policymakers’ concerns about affordability and risk.

Part 3: The Netherlands is struggling with the social consequences of rapidly rising house prices.

Part 4: Why the tenants of Berlin want to expropriate their homes from the listed owners of Germany.

Part 5: Should house prices count in inflation data, and what can central banks do to the economic consequences?

However, he also noted that some factors driving up prices are temporary, such as government tax incentives and pandemic-related economic disruptions, including the disruption of global supply chains caused by delays at ports.

Credit growth is lower than before the global financial crisis, indicating “a lower risk of a bust compared to, say, 2006-2007,” he said.

The growth in mortgage lending was largely driven by people with a strong financial position, and in most advanced countries, households were less indebted than before the financial crisis, indicating a lower risk that the situation would follow the same path with a wave of defaults and fire sales, Igan at argued the IMF.

One key factor is different from the situation almost 15 years ago: central banks, which were affected by the previous housing explosion, are now more vigilant.

Line chart of indices, rebuilt (2015 = 100) showing that house prices are rising faster than rents in the OECD

The Reserve Bank of New Zealand added house prices to its mandate and the European Central Bank called on the EU Statistics Agency to include house prices in its headline inflation calculation.

Bank of America economist Aditya Bhave said policymakers around the world are “now well aware of the risks surrounding housing policy”. Unlike 2008, it “significantly reduces the chance of an adverse outcome”, he added.

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