Across the globe, housing prices are rising at the fastest pace we’ve seen in 40 years, tracking 13% (as of 2Q21) above pre-pandemic levels. According to models from Jesse Edgerton, Senior U.S. Economist, the risk of a 20% decline in real house prices within five years remains low across developed countries. Recently, there have been rapid increases in price/rent ratios in Canada and New Zealand specifically, but overall, most countries score pretty low on these correction metrics.
As of spring this year, Home Price Appreciation (HPA) remains above 14% in the U.S. and increases continue to rally month-over-month at three times pre-pandemic levels. Michael Rehaut, Head of U.S. Homebuilders and Building Products Equity Research, notes that existing home inventory remains at extremely low levels with new homes for sale at a record low.
Low interest rates have also supported the wider availability of cheaper mortgages. With every 1% move down in mortgage rates, J.P. Morgan’s economics team sees a 10% increase in home sales. Since the onset of the pandemic, 30-year mortgage rates are down 59 basis points, while home sales have risen by 12%. Housing inventory, which was already constrained pre-pandemic, dropped to historic lows during the pandemic but is now coming off its lows in recent months. As of June, the median price of sold existing homes hit a new high of $363K.
When demand slowed, there was some debate on whether the lack of inventory kept buyers away. However, another factor – housing affordability – also greatly impacts demand. Rising HPA is mainly driven by housing shortages across the U.S. and it is expected to revert back to income growth with +7% in 2022, 5% in 2023 and trend lower towards 3% in the years ahead as forecasted by John Sim, Head of Securitized Product Research. Overall, housing inventory on average is down 20% compared to last year, but rose 6% on average across the 23 markets tracked by J.P. Morgan Economic Research.
Demographics have also contributed to the housing demand. With low interest rates making mortgages historically affordable for qualifying homeowners and the pandemic migrating the millennial generation away from the rental market into home ownership, housing demand has continued to surge despite inventory constraints. Millennials have typically waited longer to purchase a home due to affordability, as student loan debt represents a higher share of household debt – student loans reached a record high of $1.4 trillion in 2019. The Biden administration has extended student loan repayment, interest and collections until January 2022 and recently used executive action to cancel nearly $10 billion in federal student loans this year. Further student loan forgiveness could boost first-time homeownership rates for young borrowers. Alleviating student loan debt could help an estimated 2 million young adults who have historically been locked out of the housing market according to Amy Sze, Head of Asset-backed Securities Research. Demographics are also supportive of increased housing demand as the number of people becoming 30 years old will average 4 million, which is 18% higher than the 1998–2005 period.