Is a new real estate bull cycle underway? In April, the global house price index, excluding China, rose by more than 3% year-on-year. House prices in the US are 6.5% higher than a year ago, they are up 5% in Australia and are soaring in Portugal. In other countries, the market looks surprisingly strong, given the years of high interest rates.
These figures come after a difficult, inflation-adjusted period. Prices have fallen by 20% in Canada, Germany and New Zealand. They are well off their peaks in some US cities, including San Francisco and Phoenix. Meanwhile, higher interest rates and mortgage costs have made people increasingly worried about their housing costs: the proportion of Brits who say they find it "very difficult" or "somewhat difficult" to pay rent or mortgage payments has risen from 24% in early 2022 to 41% today.
Surprisingly, however, things have not been even more difficult. Since its low point in 2021, the rate on a typical 30-year mortgage in the US rose by about four percentage points. General theory from academic literature indicated that nominal house prices would fall by 30% to 50%. But, in fact, they have hardly fallen at all in nominal terms. In real (i.e. inflation-adjusted) terms, world house prices have fallen by 6% since their peak, but this brings them in line with their pre-pandemic trend. This crisis is among the shortest in history, lasting only a few months, notes The Economist.
Some experts worry that high rates will eventually cause a real downturn. In the US as a whole, the proportion of mortgages in default has never been lower, at 1.7%, compared with more than 11% at the height of the 2007–2009 global financial crisis. Elsewhere, the situation appears to be equally mild. In New Zealand, the developed country most affected by the housing crisis, arrears align with the pre-pandemic norm. Except for Germany, there are also fewer difficulties in the Eurozone.
The rise of fixed mortgages
Experts often point to the US housing market's impressive resilience due to the country's mortgage system, which relies heavily on long-term fixed rates. Other countries have recently moved in this "American-style" direction. Fixed-rate mortgages protect homeowners from higher rates, which means fewer forced sales that can drive down home prices. They also give homeowners a strong incentive not to move because they would need to obtain a new mortgage, possibly at a higher interest rate.
But fixed-rate mortgages are not the only reason for the resilience of the housing market and recent price growth. After all, applications for new mortgages remain reasonably robust in much of the world, even if they have fallen from the pandemic peaks.
The National Association of Realtors (NAR) finds no evidence that higher interest rates are deterring people from buying a first home or moving to a new one. According to recent research, only 8% said that "getting a mortgage" was one of the "most difficult steps" in the home-buying process, up slightly from 7% in 2021.
Three other factors may explain why house prices are rising again: immigration, mortgage holders making sacrifices and the economy's strength.
More migrants arriving in major economies
The population born outside the first world is increasing by about 4% year-on-year – the fastest pace on record. The official figures on which these estimates are based probably underestimate the change, as illegal immigration has also increased, especially in the US. This, in turn, is driving up both housing prices and rent, argues Mark Zandi of Moody's Analytics, as newcomers need a place to live. Goldman Sachs estimates imply that the current annualised net migration rate of 500,000 people in Australia will increase house prices by around 5%.
Cuts to pay ever-longer mortgages
The second factor relates to household sacrifices. People in the developed world are coping with higher mortgage costs by cutting other types of spending. A recent survey by YouGov found that one in five variable-rate mortgage holders in Britain say they are making "big" cuts in household spending, even though those with fixed-rate deals are less "scared". A recent report by the Norwegian central bank also noted that many households have "dipped into their savings" to pay off debt.
Longer-term mortgages are helping to spread payments, sacrificing future welfare to reduce current mortgage payments. The Canadian government recently announced that it would extend the payback period on some state-backed loans from 25 to 30 years.
Credit reporting agency Centrix notes that 6.4% of New Zealand mortgages signed last year will last more than 30 years, up from 2.3% in 2020. The Bank of England recently noted that in Britain "the trend towards longer-term mortgage lending had continued," meaning that 40% of new mortgages "would see borrowers beyond the current state pension age by the end of their mortgage term".
Improved economy
Another important factor is related to the current economic situation. Households are indeed paying more in interest, but they are also earning more. Some benefit from higher interest income on their savings, which in the EU has increased almost 10 times more than interest payments since 2020.
In contrast to what happened in the EU after the 2007-2009 housing crisis, the job market is also helping. Since 2021, average wages in the developed world have risen by around 15%, while unemployment remains close to a record low. In all countries for which we can find data, the rise in household employment income in recent years eclipses increases in interest costs. Nobody likes paying higher mortgage repayments, but most people can afford them, according to The Economist.
It will therefore not be surprising to see house prices continue to rise. Some central banks have already started to cut interest rates as inflation declines. The US Federal Reserve will do the same before the end of the year. Across the developed world, wage growth remains in fairly good shape. Falling inflation will give mortgage holders additional breathing space. And any increase in housing demand will come up against limited supply.