The pandemic has reshaped the world economy. Budget deficits have expanded, driving up public debt stocks. Central bank balance sheets have ballooned. Global supply chains have been stretched to near- breaking point. Labour markets have suffered shocks ranging from spikes in joblessness and plummeting hours worked, to rebounding wage growth, rising vacancy rates and the “Great Resignation”. Consumer preferences have shifted, household savings rates adjusted, spending patterns changed — and global house prices have boomed.
In the March quarter of this year, nominal house prices across the OECD recorded their fastest rate of increase in more than three decades. In real terms, annual house price inflation was the highest in nearly half a century. And of the 40 countries tracked by the OECD, only three saw prices fall in real terms in Q1 of 2021 — the smallest share since at least 2000. Australia is part of this broad-based trend — according to the Australian Bureau of Statistics (ABS), the rise in capital city residential property prices over the June quarter of this year was the fastest on record.
Housing market pressures extend beyond the OECD, although price rises in rich economies have tended to outpace those in emerging and developing economies. The Bank for International Settlements (BIS) estimates that while global real house prices rose by 4.6 per cent over the year in the March quarter of 2021 (their fastest rate of increase since the GFC), growth across advanced economies averaged a roaring 7.3 per cent, compared to a more modest 2.5 per cent average growth rate in emerging economies.
Fuel to the fire
Some of the trends powering house prices predate COVID-19 and include population growth, financial liberalisation, rising household incomes and a long-term decline in interest rates. Additional country-and market-specific factors such as China’s great urbanisation wave also matter. But the pandemic itself has played a key role. Central banks, for example, responded to the crisis by driving already low interest rates even lower, making it cheaper to service mortgage debt while also raising the present value of future housing services, thereby increasing the value of home ownership relative to renting. Governments, too, in their pandemic policy responses, helped boost housing values, both through measures targeted explicitly at the property market — such as the Australian federal government’s HomeBuilder scheme — but also via a range of initiatives that lifted household incomes during lockdowns which then, in some cases, became increased savings that could fund property purchases.
The pandemic also triggered major shifts in both the timing and composition of the demand for housing services. There was the accumulation of pent-up demand during the imposition of public health restrictions that was later unleashed when restrictions were eased. And there were changes in the kind of housing services sought as buyers demanded lower- density living or more space to work from home or reassessed commuting costs.
In some markets, these various demand side effects were further compounded by supply- side constraints such as lockdown limits on construction work and surges in the price of key inputs such as lumber.
Granted, higher home values have delivered important short-term economic positives to pandemic-hit economies. Construction sector jobs kept people in work. Rising asset prices strengthened household balance sheets and underpinned consumer confidence — at least among homeowners — and that in turn supported consumer spending and economic activity more broadly. But there are significant downsides. Worries about housing affordability — already a hot-button political issue pre-pandemic — have intensified, as have related concerns around inequality and social mobility. There are risks to economic and financial stability that derive from increased household borrowing to fund home purchases: if excess exuberance encourages some households to over-borrow, that will leave them — and those who financed them — vulnerable to future price correction. Finally, there are concerns around the medium-term consequences for economic growth, with some international evidence suggesting real estate booms and bloated construction sectors can depress productivity growth as labour and capital are allocated to relatively lower productivity sectors, even without any damage triggered by a financial crisis.
Threading the needle required to keep homeowners content with their property values on the one hand, and tackling affordability on the other, is no easy task. No surprise, then, that some politicians have suggested monetary authorities might like to add this job to their traditional focus on financial stability risks. Equally predictably, central bankers aren’t keen on that idea. The Reserve Bank of Australia warned recently that increasing rates to deal with housing affordability would come at the cost of “fewer jobs and lower wages” and represents a “poor trade-off”. More generally, the bankers argue that monetary policy in general, and interest rates in particular, are blunt tools to tackle housing costs and governments would do better to look to tax incentives, planning and zoning regulations, and the supply of infrastructure. That reasoning may not fend off anxious politicians, though. The Reserve Bank of New Zealand has previously advanced similar arguments, but earlier this year, the Ardern government still ordered it to consider “the impact on housing when making monetary and financial policy decisions”.
The US subprime mortgage crisis reminded us that a badly malfunctioning property market can have severe consequences. In a contemporary echo of that earlier crisis, financial markets at the time of writing were gripped by developments at property developer China Evergrande Group and the risk this could turn into China’s “Lehman moment”. Evergrande’s financing problems were partly a consequence of Beijing’s efforts to rein in a runaway property sector, which on some estimates has come to account for close to 30 per cent of GDP and has produced a potentially destabilising mix of rising corporate and household debt, eye-wateringly high house-price-to-income ratios and — on one estimate — enough empty property to house more than 90 million people. Even if some of the wilder predictions of contagion and financial crisis turn out to be wide of the mark, the implications for China’s growth model of the efforts to clamp down on the real estate sector could be substantial.
Pandemic or no pandemic, property market cycles continue to challenge the world’s policymakers.