Despite initial predictions of a housing market crash, global house prices have shown resilience and surprising strength amidst the chaos of the pandemic.
In the wake of the Covid-19 pandemic, the housing market in many parts of the world was expected to suffer a severe downturn. However, contrary to expectations, global house prices have displayed resilience and surprising strength. While pockets of weakness exist, overall market conditions have defied predictions, with prices rebounding and even surpassing pre-pandemic levels in some areas. This article explores the factors that have contributed to this unexpected trend and examines the potential risks that may lie ahead.
Shift in Preferences: The Impact of the Pandemic
One significant factor contributing to the unexpected strength of housing markets is a shift in preferences brought about by the pandemic. As people spent more time at home, working remotely and engaging in home entertainment, the value placed on living space increased. This surge in demand for housing has helped to stabilize prices and prevent significant declines.
Changes in the Mortgage Market
Another factor that has cushioned the impact of higher interest rates on housing markets is the changed landscape of the mortgage market. In countries like the United States and Denmark, borrowing on fixed rates has long been common practice, protecting borrowers from central bank rate increases. In recent years, households in other countries have followed suit, shifting towards fixed-rate mortgages. This shift has delayed the full impact of rate rises, as the average mortgage rate across the rich world has only risen by half as much as the average central bank policy rate since 2021.
Strong Household Finances
The third factor supporting housing prices is the improved financial position of households. Following the global financial crisis of 2007-2009, governments implemented stricter regulations, making it more difficult for less creditworthy borrowers to access mortgages. This has resulted in a pool of borrowers with stronger financial positions, better able to weather higher interest costs. Additionally, many borrowers have accumulated significant “excess savings” during the pandemic, which they can use to make their mortgage repayments. In fact, estimates suggest that in the average rich country outside of the United States, these savings still amount to 14% of yearly disposable income.
Potential Risks on the Horizon
While housing markets have shown resilience thus far, potential risks loom on the horizon. Mortgages with short-term fixes will soon expire, forcing households to refinance at potentially higher rates. If inflation remains persistent, central banks may need to raise rates further, increasing the burden on homeowners. Moreover, the depletion of excess savings and a weak economy leading to rising unemployment could pose challenges for some homeowners. These factors could potentially trigger a downturn in the housing market in the future.
Conclusion:
Despite initial predictions of a housing market crash, global house prices have defied expectations and displayed surprising strength amidst the chaos of the pandemic. A shift in preferences, changes in the mortgage market, and strong household finances have all contributed to this resilience. However, potential risks lie ahead, and the long-term sustainability of the housing market remains uncertain. As the world continues to navigate the aftermath of the pandemic, the housing market will undoubtedly be an area of close scrutiny and ongoing analysis.
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