How long can the global housing boom last?
NOTOVA-SCOTLAND the larger city is known for several things: a major national security conference that takes place each fall; a huge explosion that took place in 1917, causing immense devastation; and a small but impressive wine industry. He may soon be known for something else. Since December 2019, house prices in Halifax have risen nearly 50%, according to Knight Frank, a real estate company, a boom that only a small number of cities have improved. Sit down with a Haligonian and before long they will express their bewilderment at how their city has become so expensive.
Local factors play a role. Some people who had moved to distant Alberta to work in the petroleum industry lost their jobs in 2020 and returned home. Outsiders are investing in local properties in hopes that eastern Canada will become a better place to live as the climate changes. Nevertheless, the general trend is reflected in much of the world (see Figure 1). the IMFthe world house price index, expressed in real terms, is well above the peak reached before the financial crisis of 2007-2009. Stock prices of US carmakers have risen 44% in the past year, compared to 27% for the stock market as a whole. Realtors from mom-and-pop boutiques in Halifax to model look-alikes on Netflix’s “Selling Sunset” in Los Angeles have never looked better.
Now people are wondering if the party is about to end. Governments are ending stimulus measures. People don’t have as much cash left to splurge on property now that overseas vacations are back and restaurants are open. Central banks, worried about soaring inflation, are tightening their monetary policy, notably by raising interest rates. In its latest report on financial stability, the IMF warned that “the risks of falling house prices appear to be significant”, and that if they were to materialize, prices in rich countries could drop as much as 14%. In New Zealand, where prices rose 24% last year, the central bank is more blunt. The “level of house prices”, he says, is “unsustainable”.
But is it? To be sure, so far there is little evidence that the recent tightening of fiscal and monetary policy is causing a slowdown. In the third quarter of 2021, global house price growth reached an all-time high. Although New Zealand’s central bank has raised interest rates by 0.5 percentage point since October, there is only the weakest indication of slowing house price growth. Real estate prices continue to rise in the Czech Republic, even though the central bank has raised rates several times in 2021.
It may only be a matter of time before the house of cards collapses. But as a recent article by Gabriel Chodorow-Reich of Harvard University and colleagues explains, what might appear to be a real estate bubble may in fact be the product of fundamental economic changes. The article shows that the monumental increases in house prices in America from the early to mid-2000s were largely a consequence of factors such as urban revitalization, growing preferences for city living, and rising rental premiums. wages for educated workers in cities. By 2019, real U.S. house prices had all but recovered to their pre-financial crisis peak, further proof that the craziness of the mid-2000s might not be so crazy after all.
Fundamental forces can once again explain why house prices are so high today and why they can persist. Three of them stand out: strong household balance sheets; the greater willingness of people to spend more for their living conditions; and the severity of supply constraints.
Take the households first. Unlike some previous real estate booms, the well-to-do with stable jobs have driven prices up. In the United States, the average credit score of someone who takes out a government guaranteed mortgage loan is around 750, which is considered quite good by most people’s standards and much higher than before the financial crisis. In the euro area, banks have considerably tightened the criteria for granting mortgages in 2020 (although they have canceled it somewhat since). For many people, getting a mortgage has become more difficult, not easier.
People are also less vulnerable to rising interest rates – and therefore less likely to be foreclosed, which often leads to fire sales and lower prices – than you might think. Part of the reason is that rates are rising from a low base. In America, mortgage debt service payments represent about 3.7% of disposable income, the lowest number on record. But it’s also because other countries are following America on the fixed-rate mortgage path, which in the short term protects people from rising borrowing costs. Long-term fixed products are twice as popular in Germany as they were ten years ago. In Britain almost all new mortgages are fixed rate, with five-year agreements now more common. According to UK Finance, a commercial body, nearly three-quarters of all mortgage borrowers will not be affected in the short term by the recent Bank of England rate hike.
Changing preferences are the second reason why world house prices may remain high. More and more people are working remotely, which means an increased demand for home offices. Others want bigger gardens. This space race explains about half of the rise in UK house prices during the pandemic, according to the Bank of England analysis. Transactions in single-family homes, for example, have increased, while those in apartments have declined. In the rich world, household savings rates remain exceptionally high. Perhaps this has enabled people to invest more in real estate.
The third and most important reason that house prices may remain high is the supply of housing. The EconomistAnalysis of national statistics and archives reveals that in the years leading up to the pandemic, housing construction in the wealthy world, once adjusted for population, had fallen to half its mid-year level. 1960 (see graph 2). The supply of housing has become increasingly “inelastic”: increases in demand for housing have translated more into higher prices, and less into additional construction.
In many places, the pandemic has taken another hit on supplies. During the first wave of covid-19, some governments forced manufacturers to lower their tools. In the second quarter of 2020, Italian housing starts fell by around 25%; in Britain they have fallen by half. Even in places where stay-at-home orders were softer and zoning laws more flexible, like Texas, the pace of additional demand was so fast that builders couldn’t keep up, slowed down, for example, by the limited number of carpenters.
Shortages of materials and labor added to the constraints. Builders grapple with higher costs and delays for raw materials such as cement, copper, lumber and steel, and the shortage of tradespeople is pushing up wages. Windfall profits and improving margins for some home builders suggest that many have been able to pass the cost increases on to buyers. DR Horton, the largest home builder in the United States, said the average selling price of its homes rose 14% in 2021, contributing to 78% growth in earnings per share.
Some supply bottlenecks may now ease. In October the IMF noted that global per capita housing starts had started to recover, although they were still “considerably below levels of the early 2000s”. But the world has a long way to go. In May 2021, researchers at Freddie Mac, a “government-sponsored company” that subsidizes much of U.S. mortgage financing, estimated that the world’s largest economy was facing a shortage of nearly 3.8 million dollars. housing, against 2.5 million in 2018. Other estimates show the shortfall. closer to 5.5 m. In England, it is estimated that 345,000 new homes per year are needed to meet demand, but builders are further from the target than they have ever been. Unless something deep changes, expensive goods can exist for some time to come. â
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This article appeared in the Finance and Economics section of the print edition under the headline “Home Party”