House price trends since the pandemic

As at 18 August 2023

From the first stages of the coronavirus pandemic in 2020 all the way to early 2022, the dynamics of the housing market across advanced economies underwent substantial change. As the pandemic began and economic activity plummeted, central banks and fiscal authorities rushed to adopt aggressive stimulus strategies in efforts to shield their economies from a prolonged downturn. Interest rates across developed markets declined to near-or-at zero levels, and households accumulated large piles of excess savings. The appeal of low-rate mortgages, combined with strong household balance sheets, helped fuel a sharp uptick in house prices in 2021.

Source: Fulcrum Asset Management

As we entered 2022, the economic landscape began to shift. Aggregate demand remained buoyant, largely thanks to the lagged effect of the Covid-era stimulus. Moreover, Russia’s invasion of Ukraine, and the resulting disruptions to energy and agricultural markets, constituted an inflationary supply shock to the global economy. Interest rate hiking cycles quickly became the focal point of central banks’ efforts to bring inflation back down to the low single digits. Higher interest rates in turn increased household borrowing costs, making mortgages more expensive and dampening demand for homes, leading to a normalization or decline in house prices from pandemic peaks.

Looking at the chart, the US and Sweden offer two distinct narratives. Although growth across the two markets hovered around similar levels from mid-2020 to mid-2021, divergence appeared soon after. The US housing market displayed resilience in the face of rising interest rates as buyer demand persisted. Sweden, however, faced more challenges throughout its monetary policy tightening cycle driven by several fundamental factors. For a start, household debt relative to net disposable income in 2021 was 202% in Sweden, compared to 102% in the U.S. (OECD). Moreover, according to the European Central Bank (ECB), 87% of mortgages in Sweden are floating rate, in contrast to just 11% for US home-loan applications (Mortgage Bankers Association). Both factors have caused a much faster pass-through of higher central bank rates into household finances in Sweden, thereby impacting housing demand to a greater extent. Going forward, the situation in Sweden may stabilize, as highly indebted real estate development companies pull back on supplying new homes to the market.  

All in all, the housing market’s downturn across advanced economies is gaining increased attention. It is important to note that idiosyncratic reasons will largely determine the length and extent of the downtrend – and recovery – in regional cycles, while the rate of policy adjustment will be fundamental to the pace of house price recovery.

Note: The index for Sweden is represented by the not-seasonally-adjusted average purchase price of one- and two-dwelling buildings. Data for Australia and New Zealand are retrieved in quarterly frequency and interpolated to a monthly frequency. The indices for Germany, Canada, Australia, and New Zealand are not seasonally adjusted.

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FC248 18082023

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