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House Prices Are Inflating Around the World

A steady rise could be dangerous.
(jaturonoofer)
(jaturonoofer)
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Rising home prices around the world, mirroring the boom in the U.S., has set off fears of a potential bubble and some governments are getting involved to prevent disaster, WSJ reports.

Why It Matters: Lawmakers had concerns about rising property prices in the wake of years of low interest rates keeping demand strong. But the problem is new stimulus money and changes in buying habits are “turbocharging markets further.” Now, it’s a point of concern. “Many want to keep interest rates low to sustain the post-pandemic recovery, but they worry about people taking on too much debt to buy houses whose prices could stagnate or fall later. Other tools they have to cool demand, like tighter mortgage restrictions, aren’t always working, or are being postponed as authorities try to ensure broader economic growth stays on track.”

Numbers To Consider:

  1. Based on the 37 wealthy countries that comprise the Organization for Economic Cooperation and Development, home prices reached record levels in Q3 2020. At roughly 5% on the year, it’s the fastest climb in nearly two decades.
  2. Property prices, for example, are up 16% in Shenzhen over the past year and 23% in New Zealand during February compared to the year prior. Prices in the Netherlands grew at a 7.8% growth rate last year after only growing at 6.9% the year before.
  3. Mortgage interest rates are averaging 1.35% across the eurozone.

The Takeaway: “Economists see similar silver linings elsewhere, making a replay of the global 2008 housing crash, which sent the world into recession, unlikely. Hot markets could cool naturally without wider damage as interest rates rise and pent-up demand is met.”

Justin Oh:

I am not as educated in international real estate markets, but my perception of the U.S. real estate market is that we’re not in a “bubble”, despite prices being high.

I believe property prices are high because of low interest rates, easy money, high consumer savings, high demand for homes outside of metropolitan areas due to the pandemic, and low supply of homes for sale (also due to the pandemic). Furthermore, real estate is a financial asset that has been increasing in the midst of increasing money supply.

My base case prediction is that with a reopening economy, returning inventory, and rising interest rates, prices will flatten out or see short-to-mid term weakness, but not see some sort of deep crash.

A bubble, to me, many times requires exorbitant euphoria and blatant excess. In 2006-2008, this was marked by “NINJA” loans and unqualified home purchases. Buyers right now are reportedly well qualified and there are many buying in cash.

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