Impact of Rising House Prices

In the city of Kingsmere, a small town located on the suburbs of Bicester, the streets are flooded with children playing, parents chatting and cars populating the roads. In the next 10 years its projected that almost 1600 homes will be built on site with another 900 to shortly follow. In the sales office for Bovis Homes, a local real estate agency, Flip Baglee says she has “never known it to be so busy.” Rhinebeck, a village 80 miles north of New York City, has a similarly upbeat feel. Many of the properties advertised in Gary DiMauro Real Estate's window, ranging from mansions to cottages, are already sold.

House prices in the United States increased by 11% in the year to January, the largest increase in 15 years. Last year, they increased by 8% in the United Kingdom and 9% in Germany. Most industrialised nations embrace this pattern. Real house prices have increased by an average of 5% in the last year in the 25 countries tracked by The Economist.

At first glance, the resilience of house prices in the face of covid-19's economic turbulence may appear perplexing: home prices usually shift in unison with the economy. However, this time around, furlough programmes and economic stimulus have reduced troubled revenues. Interest rates on 30-year mortgages in the United States was 1.5 percentage points lower than in 2010. Lockdowns and decreased spending opportunities suggest that those who have maintained their jobs have saved money. According to Lucian Cook of Savills, a property consultant in the United Kingdom, home prices are being “driven by the haves rather than the have-nots.” In America, 14 percent of all mortgage applicants in February were for second homes, which was more than double the share in April of last year.

The rate of increase in many countries has been rapid enough to draw the interest of policymakers and central bankers. In contrast to the previous decade, rates in less populous but still commutable areas, rather than city centres, are rising the most. Covid-19 appears to have sparked a race for space that could outlast the pandemic.

Megacities like London and New York have surpassed quieter areas in a turnaround dubbed the "grand reshuffling" by Zillow, an American property-listings agency. Outside of Germany's seven largest cities, house prices soared by 11% last year, compared to 6% within them. Prices on Sydney's northern beaches, which are within commuting distance of the capital, have risen by 10%.

In comparison, house prices in central London and Sydney increased by just 4% and 3%, respectively, while those in Manhattan dropped by 4%. Rental stocks are now cooling. Last year, rents for flats in Sydney dropped by 5%. Those in Melbourne, which was shut down for 111 days last year, dropped by 8%. According to Zillow data, rentals in New York City dropped by 9%, and by 15% in Manhattan in particular.

The future of total house price growth could well be in the hands of policymakers. As the pandemic winds off, emergency help for homebuyers and renters will be rolled out: welfare benefits in the United Kingdom are set to end later in the year. Fear of jeopardising the economic recovery may cause policymakers to tread carefully for the time being.