01/10/2020 The three pillars - Why, despite the coronavirus pandemic, house prices continue to rise | Finance &

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Finance & economics Sep 30th 2020 edition

The three pillars

Why, despite the coronavirus

pandemic, house prices continue to rise
Monetary policy, scal measures and buyers’ preferences explain the unlikely
boom

Sep 30th 2020

D uring the global recession a decade ago, real house prices fell by an average
of 10%, wiping trillions of dollars o the world’s largest asset class. Though the
housing market has not been the trigger of economic woes this time, investors and
homeowners still braced for the worst as it became clear that covid-19 would push
the world economy into its deepest downturn since the Depression of the 1930s.

That pessimism now looks misplaced. House prices picked up in most middle- and
high-income countries in the second quarter. In the rich world they rose at an
annual rate of 5% (see chart 1). Share prices of developers and property-traders fell
b t i th l h f th d i b th d h f th f ll
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01/10/2020 The three pillars - Why, despite the coronavirus pandemic, house prices continue to rise | Finance & economics | The Economist
by a quarter in the early phase of the pandemic, but have recovered much of the fall.

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Some markets are zzing. In August house prices in Germany were 11% higher than
the year before; rapid growth in South Korea and parts of China has prompted the
authorities to tighten restrictions on buyers. In America growth in the median price
per square foot accelerated more quickly in the second quarter of 2020 than in any
three-month period in the lead-up to the nancial crisis of 2007-09. Three factors
explain this strength: monetary policy, scal policy and buyers’ changing
preferences.

Consider monetary policy rst. Central bankers around the world have cut policy
rates by two percentage points on average this year, reducing the cost of mortgage
borrowing. Americans can take out a 30-year xed-rate mortgage at an annual
interest rate of just 2.9%, down from 3.7% at the beginning of the year. Studies
suggest a strong link between falling real interest rates and higher house prices.
Some borrowers can a ord to take out bigger mortgages; others nd it easier to
manage their existing loans. Landlords are willing to pay more for property, because
yields on other assets have dropped. In both America and Britain, mortgage lending
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01/10/2020 The three pillars - Why, despite the coronavirus pandemic, house prices continue to rise | Finance & economics | The Economist
y e ds o ot e assets ave d opped. bot e ca a d B ta , o tgage e d g
is running at post- nancial-crisis highs.

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That is not to say that it has become easier for everyone to borrow. In fact, obtaining
a mortgage has become harder for many. Brokers, fearful of the long-term economic
impact of covid-19, have pulled back on riskier lending. British banks, for instance,
are o ering fewer high-loan-to-income mortgages. In America few loan o cers at
banks said they were tightening lending standards before the pandemic; now 60%
do. In contrast with previous periods of strong house-price growth, there is little
evidence of lax lending standards.

Fiscal policy, the second factor, may therefore be more important in explaining
buoyant prices. In a normal recession, as people lose jobs and their incomes fall,
foreclosures drag house prices down—not only by adding to the supply of houses
on the market, but also by leaving ex-homeowners with a blemish on their credit
history, making it harder for them to borrow again. But this time governments in
rich countries have preserved households’ incomes. Handouts through wage
subsidies, furlough schemes and expanded welfare bene ts amount to 5% of gdp.
In the second quarter of the year households’ disposable incomes in the g7 group of
large economies were about $100bn higher than they were before the pandemic,
even as jobs disappeared by the millions.
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01/10/2020 The three pillars - Why, despite the coronavirus pandemic, house prices continue to rise | Finance & economics | The Economist

Other measures directly support the housing market. Spain, for instance, has
allowed borrowers to suspend their mortgage repayments. Japan’s regulators have
asked banks to defer principal repayments on mortgages, and the Netherlands
temporarily banned foreclosures. In the second quarter the number of owner-
occupied mortgaged properties that were repossessed in Britain was 93% lower than
in the same period in 2019, the result of policies that dissuade repossessions. In
America foreclosures, as a share of all mortgages, are at their lowest level since
1984.

The third factor behind the unlikely global housing boom relates to changing
consumer preferences. In 2019 households in the median oecd country devoted
19% of spending to housing costs. With a fth of o ce workers continuing to work
from home, many potential buyers may want to spend more on a nicer place to live.
Already there is evidence that people are upgrading their household appliances.

People also seem to be looking for more space

—which, all else being equal, raises house
prices. Though the New York and San
Francisco housing markets look weak, there is
little wider evidence to support the idea that
people are eeing cities for the suburbs, at
least in America. Data from Zillow, a housing
marketplace, suggest urban and suburban
property prices are rising at roughly the same
pace; price growth in the truly get-away-from-
it-all areas is actually slowing (see chart 2). It
seems more likely that people are looking for
bigger houses near where they already live. In
Britain prices of detached houses are rising at an annual rate of 4%, compared with
0.9% for ats, and the market for homes with gardens is livelier than for those
without.

Can house prices continue their upward march? Governments are slowly winding
down their economic-rescue plans, and no one knows what will happen once
support ends. But lower demand for housing may run up against lower supply. High
levels of economic uncertainty deter investment: in America housebuilding has
fallen by 17% since covid-19 struck. The experience of the last recession suggests
that even when the economy recovers, construction lags behind. It may take more
than the deepest downturn since the Depression to shake the housing market’s
foundations. 7

Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today,
our daily newsletter. For more stories and our pandemic tracker, see our hub

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This article appeared in the Finance & economics section of the print edition under the headline "The three
pillars"

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