The Global House Price Boom Could Haunt The Recovery From Covid-19
Decreasing affordability raises both financial and political risks.
Decreasing affordability raises both financial and political risks.
The year of the pandemic saw the largest increase in global house prices since the U.S. housing boom of the mid-2000s. And there is no sign the rally is coming to an end.
That provides immediate economic support for the global recovery from Covid-19. But a prolonged house price upswing would mean big new problems for both financial stability. And it could result in economic strife if middle-class citizens accustomed to a one-way housing bet suddenly find the rug pulled out from beneath them down the line.
House prices rose by 4.91% across 16 economies monitored by the Federal Reserve Bank of Dallas last year, the sharpest increase since 2006. The move was large by the standards of a normal year—but explosive in the context of a global economic contraction of around 3.3%.
And the trend shows little sign of abating. The U.S. housing market is millions of homes short of buyer demand. Prices have climbed in places as varied as the eurozone, South Korea, Australia, New Zealand and Canada.
Booming prices reflect a major difference between the liftoff from the financial crisis of 2008 and the nascent post-pandemic boom. The financial crisis emanated from a fragile, undercapitalized banking sector: The obvious postcrisis response was to lend much more conservatively. But at the beginning of last year, banks were far less overextended and, with greater government support, were much more rapidly able to pass on interest rate cuts to borrowers.
At the same time, banks are far more exposed to housing markets than they once were. Across 18 advanced economies, mortgage lending has grown from around a third of total bank lending in 1960 to very nearly 60%. The financial crisis seems to have only been a brief speed bump in this secular trend.
The experience of countries that didn’t have a major banking crisis in 2008 shows what could happen on a far larger scale now. Most countries with large run-ups in household debt during the last decade—China, South Korea, Thailand, Canada and Sweden—were places where banks didn’t suffer in 2008. And rather than the brief, one-off increase in leverage of the kind many analysts expect following the pandemic today, household borrowing climbed continually over the following decade.
Many such countries have attempted to slow down rapid increases in house prices. The Korean government has enacted dozens of individual tweaks to tax and lending regulations. The latest Canadian federal budget announced a tax on vacant and underused property owned by foreigners, following existing levies in Vancouver and Toronto. So far, few measures have had an impact large enough to stall the boom.
Earlier this year, Swedish central bank governor Stefan Ingves compared the household debt situation to sitting on a volcano. The analogy is apt, given how sensitive the health of economies is to increased leverage among households in particular. Economists Atif Mian, Amir Sufi and Emil Verner have published research demonstrating that burgeoning household debt tends to slow down economic growth.
That’s not to say there’s nothing to be done. There have been a small number of successes in controlling and preventing house price booms to note. They bear much closer examination for policy makers in the rest of the world.
Japan’s case is the most obvious. The country’s lack of zoning restrictions and rent controls are regularly credited with the country’s flat home prices, particularly in Tokyo where the total population is still increasing. All the same, making fair international comparisons is difficult because interest rates have been so much lower than other parts of the world for so much longer, and overall economic growth has been so weak.
According to a study published in the Journal of Housing Economics in 2018, Singapore’s flurry of efforts to cool house prices between 2009 and 2013 also seems to have helped to stall the country’s buoyant house price growth. The measures included higher taxes on home-flipping, higher deposit requirements for second-time buyers, longer residential loan terms, and caps on the amount of a borrower’s income that could be spent on home loan repayments. But Singapore is also an example of how difficult such progress is to defend: Prices jumped to a new record in the first quarter of the year. And Singapore’s market is unique in other respects—the lion’s share of housing is publicly developed for Singaporeans to purchase, and homeownership rates are among the highest in the world.
There are other areas to look at. Outright taxes on the value of houses, the land beneath them, or both are popular with economists but have yet to find their way into public policy in most parts of the world. Even without such radical steps, fixing other positive biases housing receives in tax systems around the world would be a good start.
Dealing with an asset that is a totemic symbol of middle-class security and the main source of household wealth but is also a major financial stability risk is an unenviable task for policy makers.
But with many parts of the world already in the foothills of a new house price boom, it’s an issue that must be considered urgently if they want to avoid the mistakes of the past.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 8, 2021
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The Republican nominee says it would help bring down home prices, though these buyers account for a fraction of U.S. home sales
Former President Donald Trump said he would ban undocumented immigrants from obtaining home mortgages, a move he indicated would help ease home prices even though these buyers account for a tiny fraction of U.S. home sales.
Home loans to undocumented people living in the U.S. are legal but they aren’t especially common. Between 5,000 and 6,000 mortgages of this kind were issued last year, according to estimates from researchers at the Urban Institute in Washington.
Overall, lenders issued more than 3.4 million mortgages to all home purchasers in 2023, federal government data show.
Trump, the Republican presidential nominee, made his comments Thursday during a policy speech to the Economic Club of New York in Manhattan.
Housing remains a top economic issue for voters during this presidential election. Rent and home prices grew at historic rates during the pandemic and mortgage rates climbed to levels not seen in more than two decades. A July Wall Street Journal poll showed that voters rank housing as their second-biggest inflation concern after groceries.
Both major candidates for the 2024 presidential election have made appeals to voters on housing during recent campaign stops, though the issue has so far featured more prominently in Vice President Kamala Harris ’s campaign.
Trump has blamed immigrants for many of the nation’s woes, including crime and unemployment. Now, he is pointing to immigrants as a cause of the nation’s housing-affordability crisis. Yet some affordable-housing advocates and real-estate professionals said Trump’s mortgage proposal would fail to bring relief to priced-out home buyers.
“It’s unfortunate that given the significant housing affordability crisis that is widely acknowledged across most partisan lines, we are arguing about a minuscule segment of the market,” said David Dworkin, president of the National Housing Conference, an affordable-housing advocacy group.
Gary Acosta, chief executive of the National Association of Hispanic Real Estate Professionals, a trade organization, said, “It’s just another effort to vilify immigrants and to continue to scapegoat them for any issues that we have here in the United States.”
A Trump campaign spokeswoman didn’t immediately respond to a request for comment.
Undocumented immigrants in the U.S. can obtain an obscure type of mortgage designed for taxpayers without Social Security numbers, most of whom are Hispanic. The passage of the USA Patriot Act of 2001 allowed banks to use identification numbers from the Internal Revenue Service as an alternative to Social Security, extending a number of financial services to people without legal status for the first time.
Mortgage loans for undocumented immigrants are typically higher interest and borrowers include legal residents who have undocumented spouses, Acosta said. Lenders include regional credit unions and community-development financial institutions.
In his speech, Trump said that “the flood” of undocumented immigrants is driving up housing costs. “That’s why my plan will ban mortgages for illegal aliens,” he said.
Trump didn’t elaborate on how he would enact a ban on such loans.
Though mortgages for undocumented people living in the U.S. are relatively rare, residential real-estate purchases by foreign nationals are big business , especially in expensive coastal cities such as New York and Los Angeles. These sales have declined in recent years, however.
Close to half of foreign purchases are made by people residing abroad, while the other half are made by recent immigrants or residents on nonimmigrant visas, according to an annual survey by the National Association of Realtors. Many affluent foreigners buy U.S. homes with cash instead of obtaining mortgage financing.
In his Thursday speech, which focused mostly on other economic matters such as energy and taxation, Trump proposed other measures to bring down housing costs, including cutting regulations for builders and allowing more building on federal land. Similar ideas appeared in the housing policy outline Harris released in August .
The former president has spoken on housing-related issues in speeches at other recent campaign stops, including in Michigan last month, where he touted his administration’s 2020 overturn of a policy that had encouraged cities to reduce racial segregation .
“I keep the suburbs safe,” Trump said. “I stopped low-income towers from rising right alongside of their house. And I’m keeping the illegal aliens away from the suburbs.”
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