Chart of the week
The months come and go but the US housing market remains the same. The Case-Shiller home price index posted yet another sharp rise in April at 1.6%. This takes the year-on-year figure to 14.6%, exceeding the 2005 property bubble at its peak.
This acceleration in property prices is completely unprecedented and several factors are at play. First, despite the rise in long-term interest rates since August 2020, mortgage rates remain historically low at around 3% compared to an average of 4% in previous years. Second, health-related lockdowns have caused many households to move away from major cities. In New York, for example, apartment prices have risen only 1% while house prices in the suburbs are up 14%. Third, the current number of houses for sale is very low. Fourth, this price increase is fundamentally due to the shortage of homes built since the housing crisis in the mid-2000s.
Between 1970 and the early 2000s, an average of 1.5 million homes were being built annually in the United States. The figure rose to over 2 million before the bubble burst in 2005. Since then and for the past 15 years, only about 1 million new homes have been built annually. We can therefore estimate a housing supply shortfall of 3–4 million. In practice, the shortfall is probably lower as the rise in the number of households has also slowed, but the gap is nonetheless significant and justifies the pick-up in construction that is now under way.
Are house prices too high? When the change in house prices is compared with that in household disposable income per person, the market is far less overvalued than in 2005, especially when the effects of recent government support measures are factored in.
Although survey data show that the higher house prices have made households more cautious about buying property and following several months of decline, May saw existing property transactions rebound sharply. In the quarters ahead, a return to normal prices in raw materials such as wood should make life easier for homebuilders and prompt a rise in housing supply. Property prices should then also return to normal. However, as some governors have already noted, were the current rise in property prices to continue, the topic could become a headache for the Fed.
The following opinion was written on June 30th 2021 and is susceptible of changing.
Sources :Bloomberg and Lazard Frères Gestion, June 30th 2021
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