Why are house prices rising around the world?

Originally written as a column for insidehousing.co.uk

News that house prices are rising at their fastest rate since 2004 highlights both the perverse effects of the pandemic and long-term problems with affordability.

Average prices across the UK rose by 13.2 per cent in the year to June according to the official UK House Price Index  with Wales and the North of England leading the way.

While a low level of transactions suggests a need for some caution in interpretation, the same pattern has emerged in other house price surveys of double digit inflation led by regions outside London and the South East.

That confounds expectations at the start of the pandemic of recession about a declining market. The stamp duty holiday announced last Summer looks like an expensive mistake that has just helped fuel house price inflation.

In normal circumstances a bust might well follow the boom but continued support for the market will come from the estimated £180 billion in savings  that households have built up during the pandemic and the wealth gap  between housing haves and have-nots seems set to widen still further.

There is evidence of the same pattern emerging in housing markets around the world: annual house price growth across the 38 richest nations has more than doubled during the pandemic to hit 9.4 per cent, according to the OECD.

In the United States, house prices in May were 16.6 per cent higher than a year ago, the biggest increase in 30 years of data according to the most respected national index.

All of that is feeding into escalating costs for renters too: the national median rent is up 11.4 per cent this year, according to one estimate, which is three times the rate seen over the last three years.

In the Netherlands, house prices are up by 14.6 per cent in the last year and tax changes have seen housing associations forced to sell stock to private developers and face controversy over gentrification. .

In Berlin, campaigners have forced a local referendum next month on a proposal to force the biggest publicly listed private landlords to sell their properties to the city government at a fair price.

There may be local factors at play in a city with a history of low-cost housing and regulated rents, but the fact that one of the main targets (Deutsche Wohnen) is a privatised housing association should give pause for thought to anyone considering the stock market here.

The international comparisons above come from an excellent series on global house prices that the Financial Times has been running this month with obvious relevance for what we can sometimes see as our own unique housing crisis.  

However, the most interesting article for me is about how central bankers see rising house prices. The Bank of England and the rest have remits to keep inflation within targets set by their governments and to ensure financial stability when they make decisions about interest rates. 

Booming house prices might pose an obvious risk to the second of these objectives, yet central bankers seem confident that this is not a systemic financial risk (we have of course heard that one before somewhere).

On the first, though, their concern focuses on the impact of rising house prices on inflation more generally. The measures they use in inflation targeting (like our Consumer Prices Index) do not include housing costs but should they?

The consensus around the world’s statistical agencies is that the purchase of a house is an asset and therefore it should not be included in measures of consumption – some include rents but some do not reflect the cost of housing at all, let alone the cost of land, living space, location or any other ingredients that make up the price we pay for our homes.

The one exception is New Zealand, which earlier this year became the first country to require its central bank to include house price inflation in its deliberations about monetary policy.

As Chris Giles explains, in theory that could mean interest rates should rise in response to significant increases in house prices, but that would pose risks to the wider economy and rising unemployment. In practice the Reserve Bank of New Zealand has interpreted its remit more narrowly to mean that it should only intervene when house price rises are ‘unsustainable’.

What’s remarkable about this, and his conclusion that ‘governments and central banks will probably continue to fret about affordability – but with only limited ability to tackle it’, is what seems to be missing from the debate.

Because there are reasons for rising house prices. These include the way that different national housing and planning systems are run, more structural factors to do with rising household wealth and maturing housing markets and changes in the global financial system, but what advanced nations have in common is the way they run their monetary policy.

Interest rates fell around the world after governments adopted inflation targeting and central bank independence (in 1997 in the UK, earlier than that in New Zealand). That meant mortgage rates fell, fuelling house price inflation and the boom of the early 2000s.

Rates were cut to even further to record lows after the Global Financial Crisis and there were successive rounds of quantitative easing.

The effect was not just to underpin house prices but to fuel further rises. At the same time returns for savers fell to next to nothing, encouraging a wave of investment in assets including housing.

With interest rates cut again after the pandemic, it’s little wonder then that housing markets around the world are seeing a wave of rising prices and growing international investment accompanied by worsening affordability and rising homelessness. 


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