Housing Prices vs Inflation

Generally, several economic factors influence housing prices, with the biggest one being inflation. Economically speaking, inflation can be described as the rise in prices for the same goods. During inflation, housing is generally a good asset to have, partly because it will rise along with inflation, and partly because it is seen as a leveraged asset. As the US is the leading country with the highest case numbers during this pandemic, it is no shock that its economy is also hard hit with the effects thereof.

Since the outbreak of the Coronavirus and hard-lockdowns in several US states, sales of existing homes fell by an enormous 29% in May, when compared to May 2019. When one considers the “seasonally adjusted annual rates of sales”, this value declined by 26.6% year-over-year. This is the lowest since the Housing Bust in October 2010 and can be seen in the graph below.

Housing Prices vs Inflation 1

CoreLogic – who owns the Case-Shiller Home Price Index (HPI) is of the opinion that 2021 will be the first year where home prices are expected to decline, in more than nine years. HPI is expected to be down 6.60% in May 2021. It is important to note that the Case-Shiller Home Price Index does not include distressed sales, and does not actually see any declines in prices in the coming months. The normal HPI Forecast, which includes distressed sales; however, sees a steep decline prices in the coming months.

The graph below shows the Case-Shiller Index and the HPI forecast through to May 2021.

Housing Prices vs Inflation 2

Millions of homeowners have entered into forbearance with their lenders. Forbearance simply refers to a delay in payments where the lender and borrower agree to certain terms. Generally, interest is added to the capital amount of the original loan and the borrower will commit to repay the loan on the new terms.

Consider a high inflation scenario. Supply and demand will affect housing prices, so in the event of oversupply, housing prices will come down even with high inflation. Generally, interest rates increase along with an increase in inflation. However, a mortgage reflects interest rates. If your mortgage is on a fixed rate, you have done well as you will be repaying a payment that dropped in inflation-adjusted value. This simply means that you are paying less for the loan than when you initially took it out.

Usually, inflation can negatively affect housing prices. The most notable negative effect of inflation can be seen on the interest rate of a mortgage. In the event of mortgage rates increasing too much, people will not apply for loans. As such, demand will decline and house prices will follow suit. Everything in the housing market points to pandemic induced moves. Evidently, the housing market is in the first segments of struggling with the economic consequences of the pandemic.

The graph below indicates the relationship between housing prices and inflation. It is evident that as inflation rises, housing prices rise as well.

Housing Prices vs Inflation 3

Currently, a shortage of supply along with high home purchase demand has increased prices of the housing market during the COVID-19 pandemic. However, by the end of the US summer along with unemployment pressure, housing prices are expected to decline in areas who have been hit hardest by the pandemic. Furthermore, it appears that this health crisis along with the unemployment crisis, is seeing an over-inflated housing market and is the catalyst for triggering a downturn. As the housing market is considered to be a “slow” market, a decrease in prices can be expected within the next 6 – 12 months. The market hasn’t even begun to wade into the mess.

This opinion piece was researched and written by the TreasuryONE Dealing Team. You are welcome to phone or email us and discuss your view on the topic.