Hot house prices no cause for alarm
Globally, house prices may stoke inflation, but there shouldn’t be a repeat of 2008, says the IMF.
More than a decade ago, surging house prices – notably in the US – were among the triggers of the global financial crisis, as heavily indebted homeowners began defaulting on their mortgage payments, saddling financial institutions with a mountain of bad debt. In many cases that was a problem of their own making. And it sent house prices into reverse.
The latest surge in house prices has not been the trigger of a financial or economic crisis, but rather a consequence of one: the Covid-19 pandemic and the disruptions it has caused.
The International Monetary Fund (IMF) recently put this into some perspective with its Global House Price Index.
“While most economic indicators deteriorated last year, house prices largely shrugged off the effects of the pandemic. Of the [more than] 60 countries that enter into the IMF’s Global House Price Index, three-quarters saw increases in house prices during 2020, and this trend has largely continued in countries with more recent data,” the IMF said. (See graph.)
There are a number of reasons for this state of affairs.
White-collar workers fortunate enough to keep their jobs have sought a bigger home, as it is also their place of work. Rural properties have also become popular – you can work remotely and have space to move in case of lockdown, and maybe grow your own food in the event of a shortage. And low interest rates globally have clearly helped. The upshot is that the fundamentals of supply and demand have lined up in a bullish way on the housing front.
This has a number of consequences, the IMF notes. Housing can become unaffordable for segments of the population. A reflection of income inequality, this can widen disparities of asset inequality – a particular focus of inequality campaigners. House prices are also a driver of inflation and this has become a global concern of late.
Inflation jitters in turn are seen prompting central banks to begin raising interest rates faster than expected – “monetary normalisation” is the term of art – which would add to the costs for those who have been buying houses on cheap credit. That scenario seems unlikely for a range of reasons – including banks requiring things like down payments of, say, 10% on a home loan – to spark a new subprime crisis.
“Over a decade ago, a turnaround in house prices marked the onset of the Global Financial Crisis. However, the twin booms in household credit and house prices in many countries before that crisis – and many previous housing crashes – appear less prevalent today,” the monetary fund said.
For South Africa, rising housing prices have cooled a bit, and frankly the IMF data seems to underestimate housing inflation here in 2020. The IMF graph seems to suggest it was closer to 2%, but FNB’s House Price Index indicates that in December 2020 South Africa’s year-on-year number was running at 4.1%. It has since peaked in April at 5.1% and moderated to 3.0% in September.
SA’s Consumer Price Index quickened to 5.0% in September from 4.9% in August, driven mainly by food and fuel prices. So housing prices are not really pushing South African inflation at the moment. Of course, rising rates in SA – and gradual hikes by the South African Reserve Bank are on the cards – could spoil the party for some indebted house buyers. But a big babalas from this party may hopefully be avoided.