House price growth accelerated to 6% in inflation-adjusted terms from mid-2020 to mid-2021. All but four cities—Milan, Paris, New York, and San Francisco—saw their house prices increase. And double-digit growth was even recorded in five cities: Moscow; Stockholm; and the cities around the Pacific, Sydney, Tokyo, and Vancouver. A combination of special circumstances has sparked this price rally.
Claudio Saputelli, Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, explained: “The coronavirus pandemic confined many people within their own four walls, amplifying the importance of living space, and leading to a higher willingness to pay for housing.” At the same time, already favorable financing conditions have improved even more as lending standards for home buyers have been relaxed. Moreover, higher saving rates and booming equity markets have freed up additional housing equity.
More leverage, more risk
The low user cost of owning property compared with renting at the moment, along with the expectation of ever-growing house prices, makes homeownership seemingly attractive for households, regardless of price levels and leverage. This rationale may keep markets running for the time being. But households have to borrow increasingly large amounts of money to keep up with higher property prices.
In fact, growth of outstanding mortgages has accelerated almost everywhere in the last quarters, and debt-to-income ratios have risen. Overall, housing markets have become even more dependent on very low interest rates, so a tightening of lending standards could bring price appreciation to an abrupt halt in most markets. Nevertheless, leverage and debt growth rates are still well below their all-time highs in many countries. From this perspective, the housing market is unlikely to cause major disruptions on global financial markets.
First-time urban housing underperformance in a quarter of a century
In addition to lower financing costs, urbanization was the main pillar of house price appreciation in city centers in the last decade. However, city life has suffered a considerable blow from lockdowns. Economic activity has spread outward from city centers to their (sometimes distant) suburbs and satellites—and so has the demand for housing. Consequently, for the first time since the early 1990s, housing prices in non-urban areas have increased faster than in cities over the last four quarters.
While some effects may be transitory, this reversal weakens the case for quasi-guaranteed house price appreciation in city centers. The impact of this development will likely be even bigger in regions with stagnating or shrinking populations (e.g., in Europe), as supply will have an easier time keeping up with demand. Matthias Holzhey, lead author of the study and Head of Swiss Real Estate at UBS Global Wealth Management, concludes: “A…