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Rising mortgage rates to temper demand

Mortgage rates rose to a 12-week high in the first week February, and a further rise in the 10-year Treasury yield to 1.5% means they will increase to around 3.2% by the end of the year. Alongside surging house prices and record low inventory, that implies home sales will drop back to their pre-COVID trend over the coming months. Indeed, pending home sales have fallen in each of the four months to December. (See Chart 1.) Renewed lockdowns and the expiration of government income support led to a further drop in apartment net absorption in the fourth quarter, and a rise in rental arrears. Combined with a fall in rental growth, that cut NOI and pushed yields down further. But a new round of stimulus checks, with more support on the way, will boost rental demand this year and help bring vacancy rates down from last year’s 5.2% to 5.0% by end-2021.

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