The shelter is one of the people's basic needs, housing is the largest component of wealth for most households worldwide. The housing market is closely linked to consumer spending. Over the years, house prices have changed a lot, the collapse of a massive housing boom poses a new threat to a global economy already struggling with rampant inflation, volatile financial markets, and grueling war. A Financial Times report stated that at the end of 2021, things looked rosy for the global housing sector. Across the 38 countries in the OECD, house prices were growing at the fastest pace since records began 50 years earlier.
An analysis of data from Oxford Economics reveals a similar pattern. House prices were rising in 41 nations, from Norway to New Zealand, supported by historically low borrowing costs and purchasers with extra money to spend. However, the market dynamics fundamentally shifted just a year later. Not even a year later as the global cost of living crisis deepens, house prices are rising faster than earnings for prospective homeowners, making mortgage payments increasingly unaffordable. According to the Global House Price Index, Global housing markets globally have wrongfooted us in the second quarter of 2022. The overall index is still rising at 10% per annum, down only marginally from 10.9% last quarter. Plus, 51 of the 56 countries and territories tracked continue to register an increase in house prices on an annual basis despite the clouds, or rather storms, on the economic horizon.
Although the robustness of the housing markets during the pandemic may be largely attributed to fundamentals of supply and demand, policymakers are nonetheless closely monitoring changes in this industry. According to a recent IMF report on housing affordability in Europe, several demographic groups are unable to purchase housing due to the rise in home prices compared to salaries. As high incomes in tele-workable jobs bid for larger homes, decreasing housing affordability for less affluent inhabitants, the post-pandemic work arrangements could also worsen inequality concerns. The rise in housing costs has also affected headline inflation in some nations and may be a factor in longer-lasting inflationary pressures.
According to IMF research, policy support from governments, cheap borrowing rates, and workers' increased need for the ability to work from home were all factors in the spike in home prices. Along with these demand-related variables, the cost of several construction-related inputs increased as a result of supply chain interruptions. Bloomberg shares a similar take on the world economy already contending with raging inflation, the global monetary will be tightening, further squeezing homebuyers, adding risks that a slowdown could ripple through the economy.