Why house prices have risen again

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men parts of San Francisco, the housing market is in a tough situation. Consider the example of one swish apartment near City Hall, with quartz countertops and a roof deck, that sold in 2019 for $1.25m. Not today. After the chaos of the covid-19 pandemic, City Hall is now looking over the state of the city’s drug problems. Biblical scenes of crime and human suffering unfold every night. The flat is now listed for $769,000 – and is not yet for sale.

Away from its troubled neighborhoods, however, San Francisco’s housing market is once again strong. Prices have increased by 3% from a trough reached earlier this year. Property in swankier parts of town fetches well above the asking price. In nearby San Jose, in Silicon Valley, house prices are up 8% from the pool. The story is similar throughout the rich world: pockets of weakness, but surprising overall strength.

Photo: The Economist

Figures from the Dallas branch of the Federal Reserve suggest that global house prices rose 1.3% between the first and second quarters of 2023. Estimates for more recent months show another increase (see chart). In monetary terms this puts them in line with the previous peak reached in 2022. Adjusted for inflation, they have fallen by less than 5%. That pales in comparison to the 13% top-to-bottom decline that followed the 2007-09 financial crisis, and lasted much longer too.

Even in places where the housing market went bananas during the pandemic, making people expect a crash, prices are now higher than many feared. In Britain, the house price index produced by Halifax, a building society, rose 1.1% in October, defying economists’ expectations for a monthly fall of 0.4% (although the number of transactions is very low). Data from Zillow, a housing website, shows that American house prices are almost 2% higher than a year ago. A recent study by Bloomberg, a financial data company, suggests that house prices in Australia could rise by 7.7% this year.

All this has surprised most economists. From the beginning of 2022 the central banks of the rich world have raised interest rates by an average of five percentage points. Economists believed that house prices would fall as the purchasing power of buyers decreased, mortgagees struggled to repay their debts and the economy slowed.

Three factors, however, explain why housing markets have so far taken off higher rates. The first is a change in preferences. The pandemic seems to have made people more like solitude: they work from home more and spend more time on home entertainment than going out. People therefore place a higher value on their accommodation, increasing the demand for housing. This arrests prices down.

The second factor is the changing mortgage market. In some countries, such as America and Denmark, it has long been common to borrow at fixed rates, allowing people to protect themselves from central bank rate increases. In the years leading up to 2022 households in other countries moved in the same direction. Between 2011 and 2021 there was a portion of the mortgages EU countries fell at varying rates from nearly 40% to less than 15% (although some of the rest are fixed for just a few years). The effect is to delay the impact of rate rises. From 2021, the average mortgage rate across the rich world has only risen by half as much as the average central bank policy rate.

Home finance also makes rising interest costs more manageable – the third factor supporting house prices. After the property crisis that began in 2007, many governments introduced stricter regulations, excluding less creditworthy borrowers. Higher interest bills will be easier for wealthier people. In addition, many borrowers are still sitting on “excess savings” accumulated during the pandemic, which they can use to make their repayments. The latest estimates suggest that in the average rich country outside America, these savings still amount to 14% of annual disposable income.

Was it just delaying the housing market pain? A mortgage with a short term settlement will expire soon. Families then need to refinance, possibly at today’s high rates; if inflation remains sticky, central bankers may have to raise rates even further. Excess savings will eventually run out, and rising unemployment, coupled with a weak economy, would deter some homeowners. But for now, the rich world is far from City Hall.

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