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.