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The housing sector is a key part of the global economy, and for many homeowners in the UK and US, home equity is a major asset. Since the pandemic began, rising house prices have been a boon for many homeowners. However, with monetary policies tightening up, analysts are now predicting a potential housing crash. So, what’s the likelihood of that happening?
The Covid-19 pandemic initially boosted home prices. Lockdowns led to a slowdown in construction, which reduced the supply of new homes. At the same time, low interest rates and a surge in liquidity increased demand.
For instance, the US Congress passed a $4 trillion stimulus package, while the EU introduced a trillion euro package. The UK also eliminated stamp duties on home purchases. Many people saved more money during lockdowns, allowing them to afford larger mortgage deposits.
Additionally, logistics issues made it harder to import essential building materials, driving up their prices. Commodities like lumber, steel, and aluminum became more expensive, contributing to the rise in home prices, as reflected in the Case-Shiller index.
However, as interest rates climb, there are growing concerns about the housing market’s stability. Historically, higher rates tend to push up mortgage costs, which can dampen homebuyer demand. Recent data shows that home prices have started to drop, and new and pending home sales are declining.
Despite these concerns, the situation isn’t expected to mirror the severe crash of 2008. Household finances are generally stronger now, and the unemployment rate has dropped to 3.6%. Furthermore, the delinquency rate on single-family mortgages is at its lowest since 2006. This suggests that while the housing market may weaken, a full-blown crash is unlikely.