The real estate challenge of central banks
House prices are rising across the world at a breakneck pace: in the United States at its fastest rate in three decades while the United Kingdom has experienced the fastest growth rate in 17 years. Prices in Germany, which have missed much of the last four decades of rising house prices, have skyrocketed. Even Italy and Japan, where house prices have been moribund for decades, haven’t completely missed it.
The causes are well known. The richer workers, saving money at home, wanted something different. The ability to work remotely or at least hybrid has led many urban office workers to imagine the possibility of living somewhere with a lot more outdoor space – prices have increased most quickly in areas with larger gardens or access to beauty spots.
The price hike is not just the result of a lockdown-induced shift in priorities. Central bankers have played a role in lowering interest rates and repurchasing assets in an attempt to keep financial markets functioning and workers’ jobs. Many people will have been relieved to see house prices hold up: price cuts are hurting consumer confidence and developers’ appetites to build, as well as bank balance sheets.
But now, soaring prices are fueling the next set of challenges facing technocrats, including meeting their inflation targets. Fannie Mae, the federal housing association that guarantees some mortgages, argues that unlike the 2000s, prices will fuel rents and, eventually, general inflation. It’s also a risk to financial stability: Eric Rosengren, Chairman of the Boston Federal Reserve, argued that the danger of the housing boom turning into a collapse is also a risk to keeping inflation at its peak. goal.
Others worry about inequalities. Mortgages can be affordable for homeowners thanks to low interest rates, but tenants need larger deposits before they can buy. This means years of collecting excess funds while paying the rent. New Zealand has asked its Reserve Bank to consider the impact of its monetary policy decisions on maintaining sustainable house prices. Dallas Fed Chairman Robert Kaplan has warned that institutional investors overpay and exclude ordinary buyers – a concern he shares with anti-gentrification activists in Berlin.
Making house prices the primary objective of monetary policy would mean letting consumer prices in general fall. The impact of an overly restrictive monetary policy on wages and unemployment could mean that buying a home is even more out of the reach of tenants.
However, some initiatives could have a low impact on the housing market. The Reserve Bank of New Zealand has reintroduced restrictions on leverage, reducing the size of mortgages relative to a home’s value – a policy that has a marginal impact on prices. Rosengren suggests that the Fed should start reducing its quantitative easing program of asset purchases by reducing the rate at which it purchases mortgage-backed securities, rather than government debt. It can also help, although it is unlikely to solve the problem on its own.
Ultimately, governments must shoulder their responsibilities, first by removing policies that deliberately stimulate demand. It may be too difficult for politicians to end the favorable tax treatment of property over renting, but ending direct subsidies such as the UK’s Purchase Assistance Program would be a first step to master the housing markets. In the longer term, the solution is to encourage construction while making leasing a safer and more attractive option. Central bankers could be blamed, but it’s a problem they can’t take responsibility for solving.