Housing Markets Defy Expectations: A Tale of Two Cities

While some areas face housing market woes, others experience surprising strength

In the heart of San Francisco, a once-luxurious apartment near City Hall sits unsold, its price slashed by nearly half. The pandemic has transformed the neighborhood into a hotbed of drug problems and lawlessness, dampening demand for property. However, in other parts of the city and in nearby Silicon Valley, the housing market is thriving once again. This tale of two cities is not unique, as housing markets across the rich world exhibit pockets of weakness alongside surprising overall strength.

Shift in Preferences:

One factor that has helped buoy housing markets is a shift in preferences brought about by the pandemic. With remote work becoming the norm, people are spending more time at home and placing a higher value on their living spaces. The desire for larger homes and amenities has increased demand, preventing significant price declines.

Changed Mortgage Market:

The mortgage market has also played a role in cushioning the impact of higher interest rates. Many borrowers, particularly in countries like the United States and Denmark, have long relied on fixed-rate mortgages, shielding them from central bank rate hikes. In recent years, households in other countries have followed suit, reducing their exposure to variable rates. This shift has delayed the effects of rate rises, with average mortgage rates rising only half as much as central bank policy rates since 2021.

Strong Household Finances:

Another factor supporting house prices is the improved financial position of households. Stricter regulations implemented after the 2007 property crisis have limited access to credit for less creditworthy borrowers. Wealthier individuals, who are better equipped to handle higher interest costs, dominate the market. Additionally, many borrowers still have substantial savings accumulated during the pandemic, which they can use to meet their mortgage repayments. In fact, estimates suggest that in the average rich country outside of the United States, these excess savings amount to 14% of yearly disposable income.

Conclusion:

While economists predicted a housing market crash due to rising interest rates, the reality has been quite different. A shift in preferences, a changed mortgage market, and strong household finances have helped housing markets weather the storm. However, potential challenges lie ahead, such as expiring mortgages with short-term fixes, the eventual depletion of excess savings, and the risk of rising unemployment in a weak economy. For now, though, the rich world’s housing markets remain resilient, far from the troubles faced near City Hall in San Francisco.