Weekly Update - Housing markets face rising interest rates risk

Since Covid hit, residential property prices have surged in most developed economies. Prices are up around 30% in the United States, 20% in Germany and more than 10% in France since end-2019. This spurt has accelerated an already long-standing upward drift in prices (Chart 1). A number of factors lie behind this latest jump in the cost of housing. First, ultra-accommodating monetary policies put in place during the Covid crisis drove down interest rates. Then, savings built up during the enforced asceticism of the pandemic have left households with cash to spend. Finally, the lockdowns and normalisation of working from home have encouraged many to move to smaller towns, enhancing the appeal of these markets.
 
Over the next few quarters, the rise in interest rates now under way should rein in this upward trend in housing prices. Several factors are already constraining how much households can spend on housing. First, housing costs are now high, making them less affordable for many. Also, general inflation is eroding real incomes and squeezing purchasing power. Lastly, tougher monetary policy is starting to push up mortgage rates (Chart 2). This combination of factors suggests that activity on property markets is likely to slow sharply and could trigger contractions in house prices. In Europe, any fall would probably be limited as, with securities markets plunging since the start of the year, households still see property as their favorite way to invest savings. In the United States, the adjustment in housing prices could be sharper in the face of sharper rises in mortgage rates.
 
Longer term, however, housing markets can still count on some support factors and any price dips is likely be short-lived. In many countries, including France and the United States, housing supply lags behind buoyant demand, which is being fed by dynamic population trends. In addition, changes in environmental standards, which are particularly necessary for housing in terms of energy efficiency, will be a factor in supporting real estate investments and therefore prices in the relevant markets - particularly through government support for the energy transition.
 
Also, in the main events of the week, we chose to talk about the Swiss franc appreciation and about the partial reopening in China.

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