The housing market is an unforeseen casualty amidst the COVID-19 pandemic. According to the Bank for International Settlements (BIS), the hot housing markets are a global phenomenon. In the United States, Canada, Europe, New Zealand, and South Korea, the housing markets are seeing a surge in price growth, in some areas reaching price overvaluation of more than 20%. More specifically, global house prices are now 22.4% higher than their level immediately after the financial crisis and up 29.2% in advanced economies. The Bank of Korea even warned that real estate is “significantly overpriced” in June 2021, along with discussing the growing household debt repayment burden. In the rest of this blog, we will go over the reasons for the increased pricing, how countries and global institutions respond to them, and the actions different countries have taken to lower the costs.
The increase in pricing includes low mortgage rates, previous low housing prices, increased consumer interest, and low housing supply. For example, in 2020, despite the economic downturn brought on by the COVID-19 pandemic, Europe saw some of its lowest mortgage interest rates on record. The low interest rates piqued buyers’ confidence and interest, creating a significant demand with little supplies to fill it. In the United States, the low amount of supplies is catching up with the consumers. With an increase in consumers and not enough products, the single-family market in the U.S. is estimated to be undersupplied by 4.35 million units by 2022. Currently, the house price to income ratio is lowest in some Asian countries and highest in the Americas. There are multiple ways countries are now trying to fix these issues so that the market can stabilize.
Countries are taking legislative action to attempt to stabilize the housing markets. Canada’s central bank is the first advanced economy to shift into less expansionary policies to stop the exponential growth of housing prices. New Zealand and South Korea are expected to follow Canada’s example. However, Kazuo Momma, the former director of monetary policy at the Bank of Japan who now works for the Mizuho Research Institute, states that “Monetary policy is a blunt tool. If it is used for specific purposes like restraining housing market activities, that could lead to other problems like overkilling the economic recovery.” With this thought in mind, countries are now trying their hardest to curtail the inflation in the housing market while trying to avoid destroying the economic progress they have made since the start of the pandemic.
Some countries are turning to change loan-to-value limits or risk weighting of mortgages (otherwise known as macro-prudential policy) instead of Canada’s policies of interest-rate hiking. Each country is making the same attempt: lower prices and stabilize the market before the effects can begin hurting future populations. However, if these problems are not solved soon, we could be seeing the effects of this significant economic shift in future generations’ asset wealth.
The housing market’s current climate will not affect the average consumer in the same way that it did during other housing crises. Instead, this crisis will show its effects much longer down the line as more young people become priced out of small properties and struggle to gain any economic asset growth. These consequences are what each country is trying to avoid as they continue to make policies to counteract this housing boom.