Housing in developed economies is rising at a record pace.
If someone had pledged last summer that house prices in developed countries would rise at an unprecedented rate this year and that after the coronavirus pandemic hit, it would be innumerable. Over the last decade, we have become accustomed to financial markets moving in an orbit very different from that of the real economy (stock market indices have risen in a pandemic). However, we are now witnessing a similar, at first glance, contradiction with property prices, which are usually in line with the economy. They have reached unprecedented levels in the last 30 years, with the United States, Canada, the United Kingdom, the eurozone, Australia, and New Zealand among those affected by the upward trend.
The current situation is due to a set of factors – to the record low-interest rates in recent years, providing access to cheap financing, must be added anti-crisis government incentives for pandemic economies and supply chain disruptions that led to an increase in raw materials used. in construction.
Dynamics in the sector have evoked memories of the 2008 global financial crisis and raised concerns that fewer people will be able to afford to live in their own homes. The question is whether the lessons of the previous real estate crisis, which caused the collapse of the world economy, have been learned or will mistakes be repeated.
Where and how much?
The upward trend in the real estate market is ubiquitous in developed economies. US house prices have risen 81.5 percent in the past decade, according to the Urban Institute. This shows that the process is long-term, but the growth has recently intensified – only for the last year it was 17.6%. US prices rose 16.6% year-on-year in May, according to the S&P CoreLogic Case-Shiller National Index. According to real estate consultant Zillow, prices in the sector have risen by 15% over the past year nationally. The median price of single-family home deals in the United States rose from $ 341,100 in June 2020 to $ 361,800 in the same period this year, according to Trading Economics.
Growth in real property prices for the first quarter of 2021 compared to the same period last year also marked Canada (10%), Norway (11%), Turkey (31%), according to OECD data. In the euro area this figure is 6%, and on average for OECD countries – 9%.
Already high house prices in Denmark are growing further during the pandemic. For the first quarter of 2021, the increase is 15.3% compared to the same period in 2020, which is twice the EU average. Here, among other factors valid for other countries, the 20-year zero-interest mortgage loans issued in January 2021 by the Danish bank Nordea also contribute to the growth. In Ireland, the real estate market grew by 5.5% on an annual basis in May.
A mix of factors
At first glance, the real estate boom seems surprising amid the worst global economic crisis in decades. But the damage to the sector has not only been minimized by large-scale government financial incentives in rich countries to tackle the pandemic, but has pushed the market in the opposite direction.
The US Federal Reserve pours $ 120 billion into the economy each month through securities purchases. Social payment mechanisms and job retention schemes have led to an increase in disposable income. In most developed economies, savings have accumulated during the pandemic, much higher than in previous “normal” years. Anti-crisis tax holidays in countries such as the United Kingdom, the Netherlands and some provinces of Australia also contribute to the process.
The already high demand for housing in 2018 and 2019 has been further strengthened by these policies. They have enabled people to borrow more money and increase purchases. Mortgages have become more affordable, with many people covering their initial large installment with state aid. Continued demand since 2020, when many real estate deals and plans were postponed, also contributed to this year’s jump in prices.
Another factor in the increased housing prices is the collapse in supply chains caused by the imposed measures to limit covid-19. The shortage of raw materials used in construction, such as steel, copper and wood, significantly increased their prices, as well as those of the final product.
Last but not least, the long time spent at home during the lockdowns and the mass transition to remote forms of work and study have made many people think about more spacious homes. That is why the biggest increases in property prices are observed in small towns and suburbs. Although the growth covers the whole sector, the most sensitive is the demand not in large settlements, but in quieter and calmer ones, closer to nature.
Why this is a problem
Authorities are monitoring the situation with growing concern for both home buyers and tenants. “Today, it is harder to find a home in America at an affordable price than at any time since the financial crisis in 2008,” Marcia Fudge, the US Secretary of Housing and Urban Development, told the Financial Times. Property prices are rising faster than incomes, making them less affordable.
High demand often leads to bidding and homes are sold at a high mark-up above the advertised price. Thus, they become available only to people with the highest incomes. The increase in property prices also has an effect on rents, which have risen in the US by an average of 11.4% since the beginning of the year, according to Apartment List – three times more than the average increase for the same period over the previous three years. Rising rents are hitting low-income families the hardest, worsening their access to shelter. In some cases, they are already facing the difficulty of owing unpaid rent for several months. The situation seems critical with the expected end of the moratorium on forced evictions in the United States.
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