Higher mortgage rates to cool red hot housing market

After a bumper second half of 2020, housing market activity will lose steam in 2021 as higher mortgage interest rates and record low inventory weigh on home sales. House price growth will also fall back, as recent strong gains in prices combined with higher financing costs lead to worsening affordability. That said, strong economic growth, an easing in credit conditions, lots of savings and plenty of frustrated buyers looking for homes mean the slowdown in sales and prices will be modest. House price growth will ease from 10% y/y at the start of the year to around 5% y/y by the end. That will continue to support housing starts, which will average around 1.16m in 2021. As the labour market recovers and offices reopen, that will attract people back to cities, supporting apartment demand. We expect rental vacancy rates will drop from 5.3% at end-2020 to 5.0% by end-2021, helping rental growth rise to 2.0% y/y by the final quarter and total returns to average 6.7% this year.