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The house price supercycle is just getting started

2024-10-26 22:40:00, Ekonomi CNA

After the financial crisis of 2007-09, global house prices fell by 6% in real terms. But before long, they grew again and passed their pre-crisis peak.

When the Covid-19 pandemic hit, economists predicted a collapse of the property market.

In fact, there was a boom as people who worked from home began to look for new homes in suburban areas. Then, from 2021 onwards, as central banks raised interest rates to reduce inflation, fears grew that there would be a dramatic fall in house prices.

In fact, real prices fell by only 5.6% and are now rising rapidly again. The housing sector seems to have a remarkable ability to adapt to new conditions, whatever they may be. Perhaps he will defy gravity in the coming years as well.

Over its history, the housing sector has grown from a once negligible asset class to one of the largest in the world. Around 1950, housing prices in rich countries were stable in real terms (see chart 1).

Builders built homes where people wanted them, preventing prices from skyrocketing in response to demand. The spread of infrastructure in the 19th and early 20th centuries also helped to moderate prices, argues a study by David Miles, a former researcher at the Bank of England, and James Sefton of Imperial College London.

By allowing people to live further from work, better transportation increased the amount of economically useful land, reducing competition for space in urban centers.

The events after World War II reversed all these processes, creating the cycle we live with today.

Governments got into the business of subsidizing mortgage loans. People in their 20s and 30s were having lots of babies, increasing the need for housing. Urbanization increased the demand for housing in places that were already crowded.

During the second half of the 20th century, land use regulations were added. It became more difficult to build infrastructure, making cities less expandable. Metropolises that had once built housing rapidly, from London to New York, stopped.

In all rich countries, housebuilding expressed as a percentage of population peaked in the 1960s, then fell steadily to about half today. Housing prices began to rise steadily.

The house price supercycle is just getting started

Wrong predictions

Recent years have been less disruptive to housing markets than even the most optimistic analysts predicted three years ago. While central banks have raised interest rates, many mortgage holders haven't felt it.

Before and during the pandemic, many people took out fixed-rate mortgages, protecting them from high fees. In America, where many people have a 30-year mortgage rate, household mortgage interest payments as a share of income remain stable (see chart 2).

Young buyers are facing higher mortgage costs. But rapid income growth is counteracting this effect. Wages in all G10 member states are 20% higher than they were in 2019.

In some countries there have been fluctuations. For example, in Germany, New Zealand and Sweden, real house prices have fallen by more than 20% since the peak of the pandemic. However, in other countries, house prices fell only slightly and an increase is expected.

US housing prices hit new highs almost every month. In Portugal, prices are also rising. Other countries with weak housing markets are experiencing changes.

From 2011 to 2019, housing prices in Rome fell by more than 30% in nominal terms as Italy faced a sovereign debt crisis. Now they are growing again.

TRENDS

In the short term, house prices will probably continue to rise. Falling interest rates will help in this regard. In America, the rate for a 30-year fixed mortgage loan has fallen by nearly 1.5 percentage points since its recent peak.

In Europe, fixed-rate borrowers will soon be able to refinance at lower rates as central banks cut interest rates. But there are also deeper forces at work. Three factors will ensure that for decades to come, the housing boom cycle will continue.

The first has to do with demographics. The Economist calculates that the foreign-born population of rich countries is growing at an annual rate of 4%, the fastest growth in history. Immigrants need a place to live, which, according to studies, would drive up rents and house prices.

A recent study by Rosa Sanchis-Guarner at the University of Barcelona, ??which looked at Spain, found that a 1% increase in the rate of emigration increases average housing prices by 3.3%.

In response to record arrivals, politicians from Canada to Germany are cracking down on immigration. But even taking into account the stricter policies, rich countries will probably continue to accept more immigrants than before.

The need to care for an aging population is likely to trump the desire to tighten borders. Bank Goldman Sachs calculates that if Kamala Harris wins the US presidential election, net immigration will fall slightly, to 1.5 million a year, from more than 2 million in 2024. If Donald Trump wins, immigration is expected to fall to 1.25 million a year .

The second factor is related to cities. When Covid-19 hit in 2020, many people thought that urban areas would lose popularity. With the rise of telecommuting, in theory, people could live anywhere and work from home, being able to buy larger homes for less money.

The house price supercycle is just getting started

But it didn't happen like that. People are working from home a lot more than they used to, but big cities are still attractive. In America, 37% of businesses are located in large urban areas, the same percentage as in 2019.

The Economist calculates that the share of total employment in the capitals of rich countries has increased in recent years (see chart 3). In Japan, South Korea and Turkey, more jobs are being created in capital cities than elsewhere.

They enable even more entertainment: the share of British bars and pubs located in London has increased since the time of the pandemic. All this increases the competition for housing space, where the supply of housing is already limited.

The house price supercycle is just getting started

inFRAStRuctuRe

The third factor is infrastructure. In many cities, commuting has become more tiring, making more people want to live close to work.

In Britain, the average speed of travel has fallen by 5% in the last decade (see chart 4). In many US cities, traffic is near all-time highs, according to data from the Texas A&M Transportation Institute.

Many governments find it almost impossible to build new transport networks to ease the traffic load. California's high-speed rail, intended to connect the cities of Los Angeles and San Francisco, will probably never be built.

The turn

Some economists hope that a turnaround is taking place and acceptance of new home construction is increasing. Those people who agree to have new apartments "in their yard", have won the argument and seem to have convinced some politicians.

Some states are changing land use rules to encourage construction. In early 2022, building permits in New Zealand hit an all-time high, causing property prices to fall.

However, with the exception of New Zealand, the impact of the pro-new housing movement remains small. A paper by economists Knut Are Aastveit, Bruno Albuquerque and André Anundsen found that the "elasticity of supply" of US housing (the degree to which construction responds to higher demand) has fallen since the 2000s.

We find no evidence that there has been an overall increase in construction since the pandemic.

The problem remains more acute in cities, where regulations are stricter. In San Jose, America's most expensive city, only 7,000 homes were authorized for construction last year, far below the rate of a decade ago. But even in cities like Houston and Miami, which pride themselves on avoiding the mistakes made by other big cities, construction is slow.

Expectations

Over the next few years, housing markets may face a variety of shocks, from fluctuations in economic growth and interest rates to banking collapses.

But given the long-term effects of demographics, urban economics and infrastructure alignment, a 2017 prediction made by Messrs Miles and Sefton seems fair.

He notes that "in many countries, housing prices are likely to continue to rise faster than incomes." The largest asset class in the world is likely to become larger and larger./ Monitor.al