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With consumer prices rising sharply, central bankers have to work hard to resist the temptation to raise interest rates. The real estate boom may make the task more difficult.
Monetary policy is already being tightened. So far in 2021, there have been eight interest rate cuts and 19 increases, the latest by the central banks of Russia, Brazil and Turkey among other countries, according to Bank of America data. The prospect of an end to pandemic-era monetary stimulus in rich countries weighs on investor sentiment. Stocks have taken a hit since Federal Reserve officials released forecasts on Wednesday showing prices could rise in 2023.
The Norges Bank said it had “thrown its weight on the marked rise in house prices”. Photo: gwladys fouche / Reuters
Then, on Thursday, Norway’s central bank guaranteed it would raise borrowing costs in September, putting it well ahead of the Fed and even the Reserve Bank of New Zealand, which first raised market concerns in March. Developed countries have much more room to leave lower rates than emerging ones, because they suffer much less from fluctuations in commodity prices and the US dollar. But the Norges Bank said in a statement that it “thrown its weight on the marked rise in housing prices.”
Residential real estate markets around the world are experiencing a boom. Norway looked frothy before the pandemic, and housing prices are up 12% since January 2020. Prices in the US, UK and Germany are up 15%, 13% and 16%, respectively. In China, real estate is once again emerging as a major driver of economic growth.
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In theory, central banks set rates on the basis of inflation and, in the case of the Federal Reserve, unemployment. After the 2008 subprime mortgage crisis, officials in many countries began to take financial imbalances into account as well.
Many on Wall Street are also pointing out that rising home prices could make today’s high inflation temporarily less than it is supposed to, by making families more wasteful and increasing shelter costs. The weight of the latter in consumer baskets is so great that the small increase actually made it a major contributor to May inflation in the US, UK and Eurozone, after excluding commodity-related items.
Rather than helping investors prepare, these arguments risk driving central bankers into error.
So far, shelter costs are still low compared to 2019 trends. Some analysts dispute these calculated rents — the theoretical rent that statisticians attribute to incumbent owners — simply tracking market rents and not showing the real housing costs that result from rising property prices. But it is rents, not housing prices, that reflect what people are willing to pay to live somewhere, just as earnings are a measure of a company’s profitability, not its stock price. Asset valuations can move up and down for other reasons. In this case, they will likely react to lower interest rates, which have also led to lower mortgage costs over the past year.
Even if markets benefit from lower interest rates, officials are usually not inclined to raise them just to blow up stocks. The same should be true for real estate: Concerns should not revolve around home prices themselves, but about households taking on too much debt, which could be best addressed through “macroprudential policies” such as regulation and additional capital controls on banks.
For investors, a lot hangs over the ability of price-setters to keep their cool as economic data picks up. The Norway precedent can be dangerous.
Federal Reserve Chairman Jerome Powell described inflation expectations in the US economy and said that there are indications that prices that have risen rapidly should stop rising and falling. Credit: Al Drago / Associated Press
Write to Jon Sindreu at [email protected]
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