While most economic indicators deteriorated last year, house prices largely shrugged off the effects of the pandemic. Of the over 60 countries that enter into the IMF’s Global House Price Index, three-quarters saw increases in house prices during 2020, and this trend has largely continued in countries with more recent data.
IMF research indicates that low interest rates contributed to the boom in house prices, as did policy support provided by governments and workers’ greater need to be able to work from home. In many countries, including the United States, online searches for homes reached record levels. Along with these demand factors, house prices also increased as supply chain disruptions raised the costs of several inputs into the construction process.
While fundamentals of demand and supply can account for much of the buoyancy of housing markets during the pandemic, policymakers are nonetheless keeping a close watch on developments in this sector. The increases in house prices relative to incomes makes housing unaffordable to many segments of the population, as highlighted in the IMF’s recent study of housing affordability in Europe. The post-pandemic working arrangements could also exacerbate inequality concerns as high-earners in tele-workable jobs bid for larger homes, making homes less affordable for less affluent residents. The surge in house prices has also had an impact on headline inflation in some countries and could contribute to more persistent inflationary pressures.
Over a decade ago, a turnaround in house prices marked the onset of the Global Financial Crisis. However, the twin booms in household credit and house prices in many countries before that crisis—and many previous housing crashes—appear less prevalent today. Hence, in a plausible scenario, a rise in interest rates, a withdrawal of policy support as economies start to recover, and a restoration of the timely supply of building materials, could lead to some normalization in house prices.