Three reasons the housing supercycle is just getting going

The Economist

After the financial crisis of 2007-09, global house prices fell 6 per cent in real terms. But before long, they picked up again and sailed past their pre-crisis peak. When COVID-19 struck, economists reckoned a property crash was on the way. In fact, there was a boom, with mask-wearing house-hunters fighting over desirable nests.

Then from 2021 onwards, as central banks raised interest rates to defeat inflation, fears mounted of a house-price horror show. In fact, real prices fell by just 5.6 per cent – and now they are rising fast again. Housing seems to have a remarkable ability to keep appreciating, whatever the weather. It will probably defy gravity even more insolently in the coming years.

The history of housing involves a once-unremarkable asset class turning into the world’s largest. Until about 1950, the rich world’s house prices were steady in real terms. Builders put up houses where people wanted them, preventing prices from rising much in response to demand. The roll-out of transport infrastructure in the 19th and early 20th centuries also helped temper prices, argues a paper by David Miles, formerly of the Bank of England, and James Sefton of Imperial College London. By allowing people to live farther from their place of work, better transport increased the amount of economically useful land, reducing competition for space in urban centres.

Events that followed World War II turned all these processes on their head, creating the housing supercycle that we live with today. Governments got into the business of subsidising mortgages. People in their 20s and 30s were having lots of children, boosting the need for housing. Urbanisation raised demand for shelter in places that were already crowded.

The second half of the 20th century brought a slew of land-use regulations and anti-development philosophies. It became harder to build infrastructure, making cities less expandable. Metropolises that had once built housing with aplomb, from London to New York, applied the brakes. Across the rich world, construction of houses expressed as a share of the population peaked in the 1960s, then fell steadily to about half its level today. House prices began to move inexorably upwards.

The past few years have been less disruptive to housing markets than even optimistic forecasters were predicting three years ago. As central bankers have raised rates, many mortgage holders have not felt a thing. Before and during the pandemic, many had loaded up on fixed-rate mortgages, shielding them from higher rates. In the United States, where many people fix their mortgage interest rate for 30 years, households’ mortgage-interest payments, as a share of income, remain steady. New buyers are facing higher mortgage costs. But rapid earnings growth is helping counteract this effect. Wages across the G10 group of countries are 20 per cent higher than they were in 2019.

Deeper forces at work

Not everywhere has emerged unscathed. In Germany, New Zealand and Sweden, real house prices have tumbled more than 20 per cent since pandemic peaks. Yet in other places, house prices dropped only a bit, and a boom of sorts is under way. US house prices reach new highs almost every month, having risen 5 per cent in nominal terms in the past year. In Portugal prices are soaring. Other places with weak housing markets are turning them around. From 2011 to 2019, house prices in Rome fell more than 30 per cent in nominal terms, as Italy dealt with a sovereign-debt crisis. Now they are rising again.

In the short term, house prices will probably keep rising. Falling interest rates help. In the US, the rate on a 30-year fixed mortgage has fallen by close to 1.5 percentage points from its recent peak. In Europe, a wave of fixed-rate borrowers will soon be able to refinance at lower rates, as central banks cut their policy rates.