Weekly Update - Housing market: a (too?) favorable outlook
Residential property markets held up well through Covid on both sides of the Atlantic
When the pandemic hit, residential property was already well into a fairly long cyclical upswing. In the euro zone, prices had been rising since 2014 and investment since 2015. In the United States, prices had been rising since 2012 with moderate investment growth since 2016. The onset of Covid triggered a sharp slump in household property investment, reasonably enough given the constraints of the lockdowns. Some feared the cycle, already well advanced, was about to turn as had happened in previous recessions. But in fact markets held firm. Prices stayed high right through the high-point of pandemic restrictions, and activity and prices have mounted a healthy recovery since (5% and 15% on prices in the euro zone and the United States respectively, 15% and 5% on activity).
Conditions will remain favourable in the medium term
Several factors should help keep the housing market healthy. The economy is expected to continue its recovery, sustaining household income and job prospects even as fiscal stimulus is tapered down. Financing conditions should also remain favourable, with real interest rates still at rock bottom. Finally, some of the savings built up in the pandemic - an estimated EUR 680 bn in the euro zone and USD 2,500 bn in the United States - could find their way into the property market, as meagre yields elsewhere make property more attractive as an investment. Investors will also likely increase the proportion of housing in their portfolios, seeing it as a safe haven in uncertain times. Market considerations aside, the emergence of new teleworking practices could mark a step change from pre-pandemic practices and reduce pressure on big city centers.
Excessive growth in housing markets could lead to tighter regulation
Housing prices are helping feed current price pressures on a range of goods and services, undermining household purchasing power. Regulators could opt to tighten policy to choke off such effects. In the United States this might mean the Federal Reserve tightens monetary policy more quickly. In the Eurozone, where the ECB will be more patient, this could lead to a tightening of macro-prudential policies, which are aimed more specifically at lending conditions.
Residential property markets in the euro zone and United States held up well through Covid and should continue to be sustained by the ongoing economic recovery over coming quarters. But regulators will be keeping a close eye on these trends, which are helping feed current price pressures on both goods and services.