The global housing market has shown an impressive resilience, enduring numerous economic upheavals from the financial crisis of 2007-2009 to the recent COVID-19 pandemic. Despite expectations of downturns, house prices have often rebounded and reached new highs, demonstrating a robust upward trajectory. This article explores the historical context, current trends, and future projections for the housing market.
The Housing Market’s Unexpected Growth Post-2009
Following the financial crisis of 2007-2009, global house prices experienced a significant decline of approximately 6% in real terms. However, the market quickly recovered, surpassing pre-crisis peaks. When the COVID-19 pandemic struck, many economists anticipated a drastic drop in property values. Contrary to these predictions, the market experienced a boom as buyers competed fiercely for limited properties, leading to a surge in prices. While subsequent interest rate hikes aimed at curbing inflation created new concerns, house prices dropped by only 5.6% and have since begun to rise again.
Historical Context of Housing Prices
Until the mid-20th century, housing was a relatively stable asset class. Prices remained steady in real terms due to adequate construction keeping pace with demand. Infrastructure developments in the 19th and early 20th centuries played a crucial role in supporting this balance. Improvements in transportation expanded economically viable land, allowing people to live further from work, which reduced competition for urban spaces and kept prices moderated.
Urban Expansion and Its Effects
The proliferation of infrastructure not only supported housing affordability but also enhanced the accessibility of remote areas. As new roads and transit networks were built, urban centres grew, dispersing the pressure of high-density living and stabilizing prices across regions.
Post-WWII Shifts: The Start of a Supercycle
After World War II, various factors led to a significant transformation in housing markets. Governments began subsidizing mortgages, making homeownership more accessible. This, combined with a baby boom that increased the need for housing, fuelled an unprecedented rise in demand. Urbanization further intensified this effect as people moved to cities, escalating competition for already limited space.
Impact of Government Policies
Subsidized mortgages and favourable lending policies facilitated an environment where homeownership became a more attainable goal for many. These policies marked the beginning of a shift that propelled the housing market into what is now recognized as a long-term supercycle.
The Regulatory Shift in the 20th Century
The latter half of the 20th century witnessed a significant change in land-use regulations. These regulations and anti-development attitudes led to stricter controls on new construction, which limited housing supply. Cities that once thrived on rapid development, such as London and New York, began to face constraints that slowed their housing markets. Across many developed nations, the construction of new homes as a percentage of the population reached its peak in the 1960s and has since declined to about half that level today.
Consequences of Regulatory Policies
These regulatory policies created a bottleneck in housing supply. With fewer new homes being built, prices began to rise steadily as demand outpaced supply. The reduced construction rate reinforced a long-term upward trend in house prices, making affordability an increasing challenge for prospective homeowners.
Recent Global Housing Market Trends
Despite the economic disruptions caused by the COVID-19 pandemic and the subsequent rise in interest rates by central banks, the global housing market demonstrated resilience. Homeowners with fixed-rate mortgages, particularly in regions like the U.S., were largely protected from rate hikes. Fixed mortgage rates provided stability, ensuring that many did not face increased mortgage payments despite rising rates. This phenomenon was especially prominent in the U.S., where long-term fixed-rate mortgages are common.
Wage Growth as a Stabilizing Factor
Wage growth has also played a pivotal role in offsetting the impact of higher mortgage rates for new buyers. Across the G10 group of advanced economies, wages have increased by 20% since 2019, which has helped buyers manage the rising costs of home ownership. This dynamic has contributed to stabilizing housing demand even as borrowing costs have increased.
Regional Variations in Housing Prices
While some countries have seen sharp declines in house prices, others have experienced steady or even rising prices. For instance, Germany, New Zealand, and Sweden saw real house price drops of over 20% from their pandemic peaks. Conversely, the United States has witnessed nearly continuous house price growth, with nominal prices rising by about 5% over the past year. In Portugal, the housing market has also surged, while cities like Rome, which suffered significant price declines during Italy’s sovereign-debt crisis, have started to see recovery.
Why Some Markets Have Fared Better
The resilience of certain housing markets can be attributed to a combination of local economic conditions, policies, and historical factors. Markets that have maintained strong demand, bolstered by economic growth or favourable regulations, have generally performed better than those burdened by severe policy restrictions or economic challenges.
Projected Trends and Influencing Factors
The outlook for house prices in the near term is positive, with several factors indicating continued growth. One of the primary drivers is the anticipated drop in interest rates. In the U.S., the rate on a 30-year fixed mortgage has already declined by nearly 1.5 percentage points from its peak, making homeownership more attainable. In Europe, a wave of fixed-rate borrowers will soon have the opportunity to refinance at lower rates as central banks adjust their policy stances. These rate changes are expected to fuel further demand and support house price increases.
Opportunities for Refinancing
The ability for homeowners to refinance at lower interest rates not only reduces their monthly payments but also contributes to market stability. This trend is likely to play out across Europe as policy rates are adjusted, boosting housing affordability and sustaining market activity.
Demographics as a Driving Force
Demographic trends are a major force shaping the future of the housing market. The rich world’s foreign-born population is expanding at a record annual rate of 4%, contributing to increased demand for housing. Research has shown that higher immigration rates can directly affect house prices. For example, a study in Spain found that a one-percentage-point increase in immigration can raise average house prices by 3.3%.
Immigration Policies and Projections
Despite political efforts to tighten immigration, the need for a younger, active workforce in many developed nations is expected to sustain or even boost migrant inflows. Countries such as the U.S., Canada, and Germany continue to face the challenge of balancing immigration controls with the economic need to support aging populations. Policy changes will thus play a crucial role in how demographics influence housing demand in the coming years.
The Persistent Appeal of Urban Living
One of the surprising outcomes of the COVID-19 pandemic was the sustained desirability of urban living. Although remote work became more common and people were theoretically free to move away from crowded cities, urban centres retained their appeal. In the U.S., for example, 37% of businesses remain located in major cities, a figure that has stayed steady since 2019.
Employment and Lifestyle Benefits
Big cities continue to attract people because of their employment opportunities and vibrant social and cultural offerings. This has led to increased competition for living space in densely populated urban areas, driving up housing prices even further. In countries like Japan and South Korea, job creation remains concentrated in capitals, further supporting this trend.
The Infrastructure Challenge
Infrastructure limitations in major urban areas pose a significant challenge for housing markets. With commuting times increasing and average travel speeds decreasing, many cities are struggling to maintain their appeal for residents. For instance, average travel speeds in the UK have fallen by 5% over the past decade, and congestion levels in many American cities have reached near-record highs. These issues make it difficult for people to live further from their workplaces, thus exacerbating the housing demand in city centres.
Examples of Infrastructure Struggles
Efforts to improve infrastructure often face significant delays or failures. California’s high-speed rail project, which was intended to connect Los Angeles and San Francisco and provide greater access to potential residential areas, is unlikely to be completed as planned. Such setbacks underline the difficulty of expanding transport networks to alleviate urban congestion and support housing development.
The YIMBY Movement and Its Limited Influence
The “Yes In My Backyard” (YIMBY) movement, which advocates for easing land-use restrictions to promote new construction, has gained some traction in recent years. The movement’s philosophy aims to address housing shortages by encouraging more residential development. New Zealand provides a notable example where YIMBY policies have had some success: in 2022, the country set a record for house-building permissions, contributing to a reduction in property prices.
Challenges to Widespread YIMBY Adoption
Despite these successes, the influence of the YIMBY movement remains limited in many parts of the world. Studies show that in the United States, housing supply elasticity—the rate at which new construction meets demand—has declined since the 2000s. Even cities that have historically embraced development, such as Houston and Miami, are seeing slower building rates. The most acute supply issues persist in cities with stringent land-use regulations.
The Future of Housing: A Growing Asset Class
Economists predict that the housing market’s supercycle is set to continue for the foreseeable future. Factors such as demographic changes, urban economic dynamics, and infrastructure challenges are aligning to sustain the upward trend in house prices. In 2017, researchers David Miles and James Sefton suggested that in many countries, house prices could consistently rise faster than incomes. This prediction appears increasingly plausible as the global demand for housing continues to grow and supply remains constrained.
Long-Term Implications
The implications of a continually appreciating housing market extend beyond personal finance to broader economic policy and social issues. If house prices continue to outpace income growth, affordability will remain a significant concern, prompting calls for new policy solutions and strategies to increase the housing supply effectively.
Conclusion
The housing market’s resilience over the past decades has been fuelled by a complex interplay of factors, including government policies, demographic trends, urban economics, and infrastructural challenges. Even in the face of economic downturns, the market has often defied predictions and continued its upward trajectory. As central banks modify interest rates and demographic pressures persist, housing prices are expected to keep appreciating, potentially outpacing income growth. Policymakers and industry stakeholders will need to address these persistent trends to ensure that housing remains accessible and sustainable in the long term.
FAQs
1. What caused the rapid rise in house prices post-2009?
The recovery from the 2007-2009 financial crisis was driven by a combination of low-interest rates, increased demand, and government interventions that supported the housing market. The COVID-19 pandemic further stimulated demand as buyers sought larger living spaces, despite predictions of a market downturn.
2. How does immigration impact housing markets?
Immigration boosts housing demand as new arrivals need places to live, which can lead to increased rents and house prices. Studies have shown that even a small rise in immigration rates can have a significant impact on average house prices, contributing to the ongoing housing supercycle.
3. What is the YIMBY movement, and why is it relevant?
The YIMBY (“Yes In My Backyard”) movement advocates for relaxing land-use regulations to promote new housing development. It aims to address the chronic undersupply of housing, which has been a significant factor in the steady rise of property prices. While it has seen some success, its influence remains limited in many regions.
4. Why do cities remain central to housing demand?
Despite the rise of remote work, cities continue to be hubs of economic activity, job opportunities, and cultural life. These factors attract people to urban areas, maintaining high demand for housing in compact city centres where supply is often limited.
5. Will house prices continue to rise faster than incomes?
Many economists believe that house prices will keep rising faster than incomes due to the alignment of demographic growth, urban living trends, and infrastructure limitations. Without significant changes in policy and housing supply, affordability challenges are likely to persist.
