Why do house prices keep rising?

Posted on 25-10-2020 by F. Geurtsen

The corona crisis is having a major impact on the economy. However, despite the corona crisis, house prices have risen significantly over the past year. Therefore, according to The Economist, the pessimism of earlier this year seems misplaced and the rise of the past year and the possible ongoing trend can be explained by three factors, namely monetary policy, government policy and the change in housing preferences.

The number of transactions continues to increase in the Netherlands, and the price increase in August, at 8.2%, even reached the highest level in the past eighteen months. Home prices have risen not only in the Netherlands, but also in all other countries with highly developed economies. In the G7 countries, property prices rose by an average of 5% last year and by as much as 11% in Germany, for example.

The first factor explaining the rise is monetary policy. Indeed, central banks around the world are implementing a package of measures to mitigate the impact of the pandemic on the economy through monetary policy. The ECB, for instance, has launched a €1,350bn purchase programme and by doing so, they aim to reduce borrowing costs and increase lending in the euro area.

The above also affects mortgage rates. Since December 2019, interest rates on 10-year fixed-rate loans have fallen by 60 basis points to 2%. The fall helps improve affordability. After all, with lower mortgage rates, people can borrow cheaper and more. This ultimately results in an increase in house prices.

Government policy

The second factor is government policy and, according to The Economist, the most important factor to explain the rise in house prices in the recent period. In a normal recession, average income falls and the unemployment rate rises. This eventually causes house prices to fall.

This time, however, governments have intervened with various income support measures. Like the NOW scheme in the Netherlands, for example. As a result, household incomes have remained level, causing little or no problems in continuing to meet housing costs.

Change in housing preferences

The third factor behind the housing market boom, according to The Economist, has to do with the change in housing preferences. In 2019, households in countries with highly developed economies spent about 19% of their spending on housing costs. With everyone working more from home, potential buyers are willing to spend more on housing costs, according to The Economist. It could therefore mean that this percentage will be higher in 2020 than in previous years. At the moment, however, it is too early to judge this.

ABN Amro is now the first major mortgage lender to stop counting on housing prices falling in 2021. In a recent October 2020 research report, they assume a stabilisation in 2021. This is in contrast to research reports by ABN Amro and the other major banks earlier this year. The pessimism from earlier this year therefore seems misplaced.

Sources: https://www.economist.com/finance-and-economics/2020/09/30/why-despite-the-coronavirus-pandemic-house-prices-continue-to-rise & https://www.abnamro.nl/nl/prive/hypotheken/actueel/huizenmarkt/woningmarktmonitor-oktober-2020.html