Housing Market Monitor: housing market still dodging the economic bullet

by: Philip Bokeloh

  • House prices and purchases impervious to the weak economy so far
  • Low mortgage rates are the main factor fuelling the housing market
  • But the interest rate effect is waning and a worsening labour market will also take its toll
  • The housing market is weakening less than previously foreseen: forecasts raised

 

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We have substantially raised our forecasts for the housing market. Previously, we anticipated prices stabilising in 2021. We are now counting on a 5% increase. This major upward revision is, firstly, related to the carry-over effect. The strong appreciation in the second half of 2020 feeds through into the average increase for 2021. If prices stabilise at the current level, the average rise will already work out at 3.5%. In the year thereafter, the carry-over effect will drop out of the figures, causing a further weakening of the upward momentum. For now, we are counting on a 1% price increase in 2022.

The second reason for the increased forecast is that the future is starting to look more certain. Now that the vaccine roll-out is gathering pace in more and more countries, a recovery of economic activity is coming into sight. That is vital in order to limit the economic damage from bankruptcies and higher long-term unemployment. It is crucial for the housing market that the prospects for the labour market remain intact, as income levels directly determine the size of mortgages and, hence, property values.

Though the arrival of vaccines is reassuring, the number of unemployed will inevitably climb in 2021. Employees will be laid off when the government’s support schemes are wound down. And the same will happen when companies start to implement their announced reorganisation plans. The expected increase in unemployment will temper the housing market. Initially via fewer transactions, later via lower price increases. After a 7.5% increase in transactions in 2020, our forecast sees house purchases falling by 10% in 2021 and 5% in 2022.

Mortgage rates constitute the most important pillar under the housing market. Major central bank interventions are keeping interest rates on government loans (a key yardstick for mortgage rates) low. Central banks are expected to continue their asset purchases to support the economy. The outlook for mortgage rates and, by extension, housing costs remains positive therefore. However, once mortgage rates stabilise, the amount that buyers can borrow will stop growing. This, in turn, will cause the favourable effect of low mortgage rates on the housing market to gradually diminish.