What's Driving Increases in House Price?

The Economist October 3rd, 2020 pp59-60 |Finance & economics| Global housing markets|”The three pillars” “Why, despite the coronavirus pandemic, house prices continue to rise”

Facts presented in figures

YOY % change of housing prices in G7 countries. In 2006, YOY % change on housing prices peaked at nearly 9%, just before the mortgage crisis in America when ordinary people were buying and flipping houses, then fell precipitously to a nadir of -10% and then rose progressively to 2% by 2010. Prices then stabilized but rose to 7% in 2014 before hovering at 5% until 2018 when they dipped to 2.5% in 2019 but have now climbed back to 5%.

Share-price index of global listed residential firms at “100” in 2006, rose to about 125 before falling to 50 in 2009 but then rose progressively to 250 in 2019, dipped to 180 early 2020 and now are at 210.

Dissecting the American House-Value index in 2020 shows a disparity in rural, suburban and urban value trends from January to June; rural falling from 4.25% to 3.4%, suburban up from 3.5% to 4.1% and urban rising from 3.2% then holding steady at about 4.3-4.4%.

Summary of Article

Growth in the median price/sq.ft. for house prices “accelerated more quickly in the second quarter of 2020 than in any three-month period in the lead-up to the financial crisis of 2007-2009.”

“Three factors” are cited.

1) Monetary policy-Central banks have cut rates. 30-year fixed rate in American fell from 3.7% in January to 2.9% currently. Historically, as now, there is an inverse correlation between interest rates and home prices. Low rates increase demand which supply may not fulfill in a timely way. Of note banks are increasingly, since the pandemic, extending the best mortgage loans only to the most qualified. This constraint contrasts to the freewheeling period leading up to the mortgage meltdown of 2007.

2) Fiscal policy-Pandemic stimulus packages have helped ease the burden. “Other measures directly supporting the housing market, Spain, for instance, has allowed borrowers to suspend their mortgage repayments.” “In America foreclosures…are at their lowest level since 1984”

3) Change in buyer preference-many are now working from home and are correspondingly upgrading their current space or moving up to something “nicer” or more spacious. As mentioned, urban prices have flattened while suburban prices are still trending up due to stronger demand. There is a tangible “fleeing [of] cities for suburbs” likely caused by fear of COVID in crowded spaces and the ability to work from home. “In Britain prices of detached houses are rising at an annual rate of 4%, compared to 0.9% for flats, and the market for homes with gardens is livelier than for those without.”

Uncertainty about additional stimulus packages and ongoing COVID-concerns are clouding the economic outlook. Given such an environment, it’s unclear if house prices will continue rising. Favoring a continued uptick in house prices would be a dwindling supply. The article notes that “American housebuilding has fallen by 17% since covid-19 struck.” Not noted in the article, is that with mortgage forbearance foreclosure resulting for COVID job loss, if such losses are sustained, won't playout until late in 2021.

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