Abundant Cheap Credit Boosts Home Prices
Abundant Cheap Credit Boosts Home Prices
House prices in developed economies are soaring. In America they increased by 11 per cent in the 12 months to January, their fastest pace in 15 years. In New Zealand, prices are up by 22 per cent; in Germany by 9 per cent and in Britain by 8 per cent.
How can this be happening in a world where economic growth has been devastated by governments’ anti-pandemic policies?
“Home values, like the price of other assets, have been boosted by low interest rates and fiscal stimulus,” says The Economist. “Many households have spare cash sloshing around – savings rates have increased by more than half in the rich world – and borrowing has rarely been cheaper.
“Separately, Civid-19 has caused a shift in demand away from big cities to housing in less crowded places. The expectation that commuting may no longer be daily has caused house prices in suburban locations to rise faster than in cities – reversing a decade-long trend.”
Does the boom have room left to run?
Bulls argue that government stimulus programmes and pandemic shutdowns have lowered consumer spending, leaving household balance sheets unusually healthy. Remote working has encouraged people to prioritize their living environments. Interest rates are near all-time lows.
Bears’ counter-arguments are that those interest rates have been rising quickly; that mounting debt will force governments to tighten their belts. Rents in big cities have fallen sharply.
The Economist’s statistical forecasting model for house prices suggests the rally is likely to stall but not to reverse. It expects appreciation to slow to 3.4 per cent this year and to 0.7 per cent by 2023. Among big markets the model is most bullish for the next two years on France and Germany.
Abundant Cheap Credit Boosts Home Prices taken from our ‘On Target Newsletter’ issue no 267
