Increases in House Prices Reoccur

An image of Alamo Square in San Francisco is shown above. It was taken by Jim Wilson for the New York Times and distributed by Eyevine.

 In certain areas of San Francisco, the housing market is in serious trouble. As an example, a luxurious apartment near City Hall with quartz countertops and a rooftop patio was sold for $1.25m in 2019. Now, after the chaos of the covid-19 pandemic, this same area near City Hall has become associated with drug problems and lawlessness. The same property is now listed for $769,000, but has yet to be sold.

 Though there are still areas of difficulty, San Francisco's housing market has regained its strength. Prices have increased by 3% since the lowest point earlier in the year, and the more upscale areas are selling well above the requested amount. The same trend is seen in San Jose, where home values have risen 8% since the dip. This same pattern of recovery is seen across the prosperous nations, with some areas still struggling but, in general, a surprising level of fortitude.

 A picture, provided by The Economist, is presented that shows a wide landscape with a white picket fence. The scene is composed of a large, grassy area with a few trees and a small house in the distance. The picket fence is a prominent feature, dividing the open area from the rest of the scene.

 Data from the Dallas branch of the Federal Reserve reveals that the worldwide house prices increased by 1.3% from Q1 to Q2 2023. Reports for more recent months suggest that the trend is continuing (see chart). This is in line with prices from 2022 before inflation adjustments. This is much less significant than the 13% fall between 2007-09, which also endured for a greater period of time.

 In the midst of the pandemic, even in places where the housing market went through a turbulent period, prices have gone up and are higher than expected. For instance, Halifax's house-price index in Britain increased by 1.1% in October, contrary to the forecasts made by economists of a 0.4% fall. Additionally, Zillow, a housing website, reports American house prices to be 2% higher than a year ago. Lastly, Bloomberg's survey predicts a 7.7% increase in Australian house prices this year

 This sudden upturn has been a shock to most economists. In the beginning of 2022, central banks of the wealthy nations hiked up their interest rates by an average of five percentage points. Analysts had expected a decrease in house prices as purchasers' purchasing power decreased, loaners had difficulty settling their loans and the economy experienced a slowdown.

 Despite rising interest rates, three aspects have allowed the housing market to remain robust. Firstly, the pandemic has impacted consumer behaviour and preferences, leading them to become more 'hermit-like'. This has caused individuals to value their living space more, thus increasing the demand for housing and preventing any price drops.

 The second factor is that the mortgage market has changed. In the U.S. and Denmark, people have typically taken out loans on fixed rates to protect themselves from increases in the central bank's interest rate. From 2011 to 2021, the proportion of mortgages in EU countries on variable rates dropped from almost 40% to less than 15% (though some are only fixed for several years). This has delayed the effects of rate hikes. Since 2021, the average mortgage rate across the developed world has only increased by half as much as the average central bank policy rate.

 The third element that is aiding house prices is the fact that households are better able to deal with increasing interest rates. Since 2007, stricter laws have been instated which prevent less creditworthy borrowers from getting a loan. Individuals with higher incomes are better able to cope with the higher costs of interest. On top of this, people in many countries have built up significant "excess savings" during the pandemic, which they can use to make repayments. The most recent estimations suggest that, on average, in wealthy countries not including the US, these savings amount to 14% of yearly disposable income.

 Might the impact of a housing-market downturn be simply postponed? Mortgages with temporary fixes are soon to reach maturity. Homeowners may need to borrow more money at the current heightened interest levels; if inflation persists, central bankers could be compelled to up their rates. Eventually, the extra savings will be used up, and a rise in unemployment, associated with a sluggish economy, could put some people in jeopardy. However, at this point, the affluent countries are far away from the City Hall.

 The recent increase in house prices can be attributed to a number of factors. Among them, a decrease in unemployment, an uptick in consumer confidence, and a steady supply of inventory can all be seen as contributing to the trend. Moreover, an increase in mortgage rates, together with the potential for a tax-cut, have also had an impact. All of these factors have come together to create an environment where house prices have once again risen.