House prices continue to go through the roof - The Economist

AMERICAN POLICYMAKERS might be worrying about the pace of consumer-price inflation, but the cost of household goods is not the only expense to have risen faster than usual over the past year. House prices in the country rose by 17% in the year to May, the fastest pace since records began in 1975, according to the latest S&P Case-Shiller index.

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House prices are going through the roof in many parts of the rich world. The Economist’s global house-price index tracks real house-price inflation in 28 countries. In the latest 12 month period available for each country, prices have risen in 26 of them, by 7.1% on average. In Britain they are up by 7.4%; in Canada by 11.2% and in New Zealand by 26%. The pace is quickening in many places, too. In 16 countries house-price inflation sped up in the latest quarter compared with three months earlier.

This is causing unease among some policymakers. Jerome Powell, the head of America’s Federal Reserve, calls the rising prices “too much”. In February New Zealand’s government instructed the country’s central bank to consider the effect of its monetary policy decisions on house prices. In June the Bank for International Settlements, known as the central banks’ bank, said that over the past year home values have risen more than economic fundamentals, such as borrowing costs and rents, would imply. This month the European Central Bank will begin measuring the cost of owner-occupied housing in its inflation reports.

To measure whether housing is fairly valued we compare the path of house-price inflation to two metrics: rents and income. If, for a sustained amount of time, prices rise faster than the rents they generate, or than the increase in household incomes that service mortgage debt, that could serve as a warning that prices do not reflect economic fundamentals.

On this basis, house prices are more than 20% above their long-run average (back as far as 1975 for some countries) when compared with rents in 15 of the 25 countries for which we have data; and in 10 of 23 countries when compared with incomes. Prices look especially askew in Canada, New Zealand and Sweden, where they are more than 60% overvalued compared with an average of incomes and rents.

After covid-19 restrictions meant millions of people were forced to spend more time at home, the pent-up demand for housing was perhaps an inevitable outcome. Housing bulls argue that prices have further to run: savings rates have increased for many people, and they may be willing to spend more of their income on a bigger home to accommodate remote work. Housing bears argue the prices have been propped up by low interest rates and plentiful credit: if interest rates do rise sooner to dampen America’s consumer-price inflation, house prices may stop rising. In either case, it’s clear that the pandemic has fuelled the housing market. As pandemic restrictions recede, policymakers should focus on long-term reforms, such as making it easier to build homes and ending taxes that benefit home ownership, to help mitigate the risk of a future bust.

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House prices continue to go through the roof - The Economist
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