Global Macro Snapshot

Home price inflation ranges from record strong (e.g. the U.S.) to very weak (China and other parts of EM). In the hot markets, prices are now very high relative to both incomes and rents. However, some of the surge is a side effect of the move to remote work and prices are more likely to flatten out than collapse.

Home price inflation is very high in many markets, suggesting common factors at work including low borrowing rates and the increased demand for home office space. Some smaller markets are standout strong such as New Zealand, which has already begun to cool off. The U.S. also seems to stand out due to its unusually strong economy and unusually late central bank. Near the other end of the spectrum, China seems to be deliberately cooling the housing market and discouraging speculation.

According to the Bureau of International Settlements (BIS), real residential home prices accelerated in advanced economies to a hot 9.2% yoy rate in 3Q 2021 – the highest in the series’ limited history back to 2008 – before cooling to 8.1% in 4Q. Again, the U.S. has been a standout with real home price growth of 11.5% and 11.0% over the same period, surpassing the advanced aggregate.

Emerging economies have experienced a much different path, however. Real home price growth based on the BIS data has remained fairly tame throughout the pandemic, reaching a high of 2.6% yoy in 1Q 2021 and edging down to 1.9% by the end of the year. China in particular saw real home prices of -0.1% yoy in 4Q 2021. The global backdrop is going to skew towards the advanced economies given their size and influence. As a result, global home prices are still booming even with the emerging economies’ softness. The boom has pushed global home prices increasingly out of line with fundamentals, based on Organization of Economic Co-operation and Development (OECD) metrics. The bottom line is that this boom is looking unsustainable and seemingly ripe for reversal, especially as policymakers across developed markets gear up to fight inflation

Flat or flat-lining?

While the fundamental outlook is weakening, we are reluctant to forecast an outright decline at the global level for four reasons. First, while some markets may retrench, the weakness is unlikely to be synchronized. Second, history suggests that most booms are followed by weak rather than falling prices. Third, this housing boom has been relatively short in duration and has not been fueled by easy credit. Indeed, most homes in the booming markets have plenty of equity. This means low risk of a vicious cycle of falling prices, triggering defaults, triggering even lower prices and so on.

A fourth and final reason for cautious optimism is that a good chunk of the rise in prices may be due to changes in patterns of work. The pandemic has caused a shift in the share of the population working from home, especially for well educated workers who tend to own homes. This means stronger demand for space, putting pressure on both rents and home prices. Of course, this weakens the demand for office space, but that likely takes time to play out. We are worried about a lot of stuff these days, but we don’t see a broad-based housing bubble.