Rising housing prices often reflect a country’s economic growth and health. This may be a type of “good inflation,” but wages and other metrics may not keep pace. Our Chief Market Strategist and Head of Franklin Templeton Investment Institute, Stephen Dover, discusses how the pandemic may have globally fueled inflation in housing and the supply chains that build them.
Benjamin Franklin once complained about inflation and rising housing costs, exclaiming “Rent of old houses and value of lands…are trebled in the last six years.” However, steadily rising prices often reflect a country’s economic growth and health. With real estate being the greatest source of wealth for many families, this may be a type of “good inflation” that is consistent with improving prospects for households.
- Home prices are rising globally. In the first quarter of 2021, the average annual nominal-house-price growth accelerated to the fastest pace since 1990 across the Organisation for Economic Co-operation and Development’s (OECD’s) 37 advanced economies.1
- Many nations’ government responses to the pandemic included fiscal stimulus payments and ultra-low interest rates, fueling an estimated US$2.2 trillion dollars of excess US household savings2 and lower mortgage costs for homeownership, while raising the US median price of a home.
- In April 2021, the sale price of the median home increased to a record high of US$341,600, a 19.1% year-over-year increase. However, the number of US home sales dropped -2.7% to 5.85 million, the third straight month of decline,3 as the pandemic continues to affect home sales, the building of new homes, and building material costs and constraints. Rising home prices and building material costs provide a level of cost-push inflation.4
- The pandemic demonstrated that working from home did not necessarily lead to lower productivity—workers are no longer tethered to cities, offices, or a country. Relocations away from urban hubs to new destinations have created housing dislocations and shortages that would not have been expected pre-pandemic.5 It may take a while for the new work hubs to build sufficient housing for the new world of working from anywhere.
- One key metric to watch is whether employment and wage trends keep up with these inflationary forces. If not, the home price rises may not feel so “good” anymore.
For more on how inflation globally affects investors in additional sectors, please read “Inflation, Rotation and Opportunities ” which includes nuanced outlooks by Western Asset; Glenn Voyles, Franklin Templeton Fixed Income; Aram Green and Mary Jane McQuillen, ClearBridge Investments; Matthew Moberg, Franklin Equity Group; Manraj Sekhon, Franklin Templeton Emerging Markets Equity; Brooks Ritchey, K2 Advisors; and Tim Wang, Clarion Partners.
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1. Source: Financial Times, “Why haven’t house prices collapsed? With economies shrinking at an unprecedented rate, house prices were expected to plummet — so why have they been surging in most western countries?” by Valentina Rome, May 11, 2021.
2. Sources: US Federal Reserve, US Bureau of Economic Analysis, and St. Louis Fed, data through March 31, 2021.
3. Source: National Association of Realtors, “Existing-Home Sales Decline 2.7% in April,” May 21, 2021.
4. Source: The Conference Board, “Consumer Confidence Index, Plans to Buy Home,” index on households’ home purchasing plans forecasts declining home sales within the next 6 months, and in May 2021, sales declined to levels not seen since February 2013. There is no assurance any estimate, projection, or forecast will be realized.
5. Sources: National Association of Realtors, “Existing-Home Sales Decline 2.7% in April,” May 21, 2021 and the U.S. Census Bureau Federal Reserve Statistical Release. For more information on housing prices by country, see “OECD Data Housing Prices” and National Association of Realtors, “Summary of April 2021, Existing Home Sales Statistics,” May 21, 2021.
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