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The Housing Price Bubble Unlikely to Burst Anytime Soon

The Economist January 8th 2022 |Finance&economics|Residential property|”House Party” “How long the global housing boom last?”

Read The Economist for all the details

Summary by 2244

Looking at a global index of House Prices from 31 economies it’s clear the YOY % change in prices is at its highest level going back to 1997. The previous peak was a little more than 6% in 2005, then fell with the mortgage loan debacle hitting in 2008 lower than -3% but has climbed with some fluctuation since to more than 10% today. There are some unique parochial forces but there are three common threads in the rich world.

What are some unique local factors driving higher home prices in selected locales?

Local influences-”Since December 2019 house prices in Halifax have risen by nearly 50%.” Behind this nearly unparalleled price increase are “out-of-towners…investing in local property in the expectation that eastern Canada will become a more desirable place to live as the climate changes.” In Texas home builders have kept pace until recently, but too are challenged somewhat by the other market forces, and have been able to push price increases to buyers expanding profit margins. As an example DR Horton, America’s largest homebuilder, said the average sales prices of its homes shot up by 14% contributing to 78% growth in earnings per share.”

What are the factors driving higher home prices globally?

Three factors are cited in the article; some households are doing very well financially and have the funds to bid up prices, qualified buyers are willing to spend more on housing especially as more space is needed for those that work-from-home, and most importantly supply and labor constraints-made worse by the pandemic and early retirement are driving up prices as demand is outstripping supply. Other factors are contributing as well including low interest rates.

Is the housing price bubble likely to burst?

"In its latest financial stability report the IMF warned that 'downside risks to house prices appear to be significant'...and...could fall by up to 14%." Others argue true that in time there may be a pull back in prices but currently the shortage of homes estimated as high as five million in America does not support lower prices in the near term. Currently, “Houses built per 1,000 people in 11 advanced economies” hit bottom in 2010 at three per 1,000 and rose sluggishly to about four per 1,000 currently. In the early 1970s the rate was about ten per 1,000. So adding new inventory, the current build rate, is not sufficient to appreciably expand inventory. Secondly, more of the world has adopted fixed rate mortgages-common in America and nearly three quarters of mortgage holders in the UK, for example, won’t be impacted if rates rise-this means fewer foreclosures that effectively keeps the housing inventory tight. Thirdly, even if rates rise the base interest rates are still historically low and that facilitates continued high-demand for homes. Fourthly, demand for detached homes is higher than townhomes and condominiums-easier to add volume of multiplex housing as compared to single-family detached homes again maintaining pressure on detached home prices.

So The Economist concludes “Unless something profound changes, pricey property may be around for a while yet.”


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