Soaring home prices across dozens of countries covered by the OECD are booming in one of the broadest rallies in two decades amid record central bank stimuli resulting in low-interest rates inflating global real estate markets, according to an analysis by the Financial Times.
Central banks continue their crisis support of buying mortgage bonds to suppress rates to inflate real estate further. In the first quarter of this year, only three countries out of the 40 countries covered by OECD data experienced real-term home price declines – the smallest portion since the Dot Com era in 2000.
A combination of low-interest rates, savings accumulated during lockdowns, and the migration to rural communities fueled the broadest house price boom in two decades.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, said house price growth could be “a good thing for the economy because people who already own homes feel richer and they can spend more due to the valuation of their assets.”
Borio warned if prices continue to trend higher, the boom could become “unsustainable” and eventually be thrown “into reverse.” This brings up worsening financial stability concerns as the threat of a pullback lingers if the Federal Reserve is forced to taper or announce tapering in the near term.
OECD annual house price growth recorded 9.4% – the fastest in three decades for the first quarter.
Deniz Igan, deputy chief of the macro-financial division in the IMF’s research department, said most markets in the northern hemisphere experienced “strong house price growth over the past year.” In April, US housing prices increased at their fastest rate since the early 1990s.
Home prices are on the rise across OECD countries. Some of the most robust growth was observed in the UK, South Korea, New Zealand, Canada, and Turkey.
Borio explains that housing prices are booming because of “extremely accommodating financial conditions” via central banks that have resulted in record-low interest rates. Lower borrowing costs make homes more affordable to buyers.
Across the OECD, mortgage rates have fallen to near-zero.
At the same time, people cooped up in their homes for a year led to decrease spending and a boost in savings. Compound that with low-interest rates and remote work, it led to a perfect combination of urban flight.
Also, the lack of supply, as explained by Mathias Pleissner, an economist at the rating agency Scope Ratings, “amplified” housing prices. He also said the surge in commodity prices was another factor.
This all comes as the cost of homes in OECD countries have become the least affordable since 2007. The gauge of housing affordability is the average of house price-to-income and house price-to-rent indexes.
So what can derail the central-bank-induced housing boom? Well, a pullback in emergency stimuli would be unsettling for markets and send property prices lower. Also, the flood of housing supply can force the market frenzy to take a breather.
