How vulnerable are house prices to a rise in rates?

Our forecast for mortgage rates to rise to 4.2% by end-2023 will help slow house price gains, but we don’t think that increase will be enough to cause an outright fall in values. And with homes not particularly overvalued, inventory close to record lows and nearly all borrowers protected by fixed rates even a more substantial rise in interest rates is unlikely to cause a crash in values. For example, we think a surge in mortgage rates to 6% by end-2023 would only bring prices down by around 5% over the next 2½ years, taking values back to where they were at the start of 2021.
Matthew Pointon Senior Property Economist
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US Housing Market Chart Book

Rising mortgage rates will help cool booming prices

Mortgage rates are on the rise and we expect they will see further gains to end the year at around 3.5%. That, alongside relatively tight credit conditions, will help cool rampant house price inflation. From close to 20% y/y in July, we expect a slowdown to 15% y/y by end-2021 and 3% by end-2022. Stretched affordability will also weigh on home sales, although the drop in first-time buyers has at least arrested the fall in inventory. After four months of consecutive falls single-family building permits were unchanged in August. But with lumber prices rising again and shortages of other materials and labour, we don’t expect a strong rise over the remainder of the year. The lack of homes for sale and the reopening of cities have been positives for the rental sector. Vacancy rates are falling and rental growth is picking up, driving strong investor demand and pushing yields to record lows. We expect yields will stay low for the next year at least.

15 October 2021

US Housing Market Update

Will sales of condos continue to outperform?

Sales of condos have been on tear in recent months, with their share in total existing home sales reaching a 14-year high in June. The reopening of cities helps explain that development, and condo sales have also benefitted from comparatively favourable inventory and pricing. With house prices not set to decline and mortgage rates on the rise, demand for relatively affordable condos is set remain high.

7 October 2021

US Housing Market Data Response

Mortgage Applications (Sep.)

Home purchase applications rose for the first time in six months in September, even as mortgage rates increased to a 14-week high by the end of the month. But we expect a further rise in mortgage rates to around 3.5% by the end of this year and, combined with soaring house prices and tight credit conditions, that will weigh on home purchase mortgage demand. We therefore expect home purchase applications will drift lower over the remainder of the year.

6 October 2021

More from Matthew Pointon

US Housing Market Update

End of eviction ban won’t stop recovery in rents

The eviction ban has been extended to early October, but we doubt it will be renewed again. Given the strength of the labour market, significant government support and robust rental demand, the resumption of evictions will not boost the rental vacancy rate. In turn that will support rents, with REIS effective rental growth set to rise to 4.0% y/y by mid-2022. The threat of eviction will also cut arrears which have weighed on CPI rental growth in recent months, helping to close the gap with asking rent measures. In view of the wider interest, we are also sending this US Housing Market Update to clients of our US Commercial Property service.

19 August 2021

US Housing Market Focus

The death of house price cycles?

The housing market is highly cyclical, and the current price boom marks the fifth episode since 1970 where real house price growth has exceeded 5% y/y. But there are good reasons to think this will mark the last house price boom for next 30 years. Interest rates are already at record lows, and we expect they will rise gradually over the next 30 years. New regulations mean credit conditions have not loosened even as house prices have boomed, and that argues against a repeat of the mid-2000s boom. Overall, once the current cycle has passed, we expect house prices will grow more-or-less in line with earnings, leaving real house price growth at around 1.5% y/y from 2030 to 2050.

12 August 2021

US Housing Market Chart Book

Home sales and house prices to moderate

The share of households seeing now as a good time to buy a home has fallen to 39-years lows, as booming house prices, tight credit conditions and record low inventory have weighed on sentiment. But the share actually planning to buy has not seen such a large dip, so we expect existing home sales will moderate rather than crash. That easing in demand, and a gradual rise in mortgage rates, will help cool house price growth from record highs to around 10% y/y by the end of the year. In contrast to homebuying demand, rental demand has recovered strongly. Rental vacancy rates in some cities are now falling back, and timelier measures of rents are picking up. Given low risk-free interest rates that will boost apartment capital values and push total returns to 10.8% in 2021.

11 August 2021
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