Q: Matt, this surge in US house prices – they were up around 12% year-on-year at the last measure – is it sustainable?
A: Activity has been boosted and house prices have been rising on the back of pent-up demand being released by easing lockdowns. That has combined with record low mortgage rates, a surge in savings and the demand for more living space. But affordability is eroding as prices rise. Yes, we’ve seen big gains over last year, but there are signs that growth is already cooling in month-on-month terms. We think this trend will become more pronounced and that on-year price growth will cool to around 5% by year-end.
Q: What threat do rising mortgage rates pose to this market?
A: We think mortgage rates will rise further, to around 4% by the end of the year. That’ll play a part in cooling house price growth, though a fall in values seems unlikely. The inventory of homes for sale is going to stay very low for the next couple of years and, alongside the stock of cash savings built up over the past year, that’s going to support home values.
Q: Presumably low inventory is good news for homebuilders?
A: You have frustrated buyers who haven’t been able to find a home in recent months, as well as favorable demographics, and that’s going to support housing demand for the next couple of years. While we’re seeing delays in starts in the short-term on the back of rising materials prices, homebuilder order books are filling up and we’re telling clients to expect a 16% jump in single-family housing starts this year compared with 2020.
Q: You’ve touched on the hunt among households for more space, and we’ve seen a big jump in apartment vacancy rates in large cities on the back of an exodus to the suburbs. Is this a trend you see continuing?
A: As cities reopen, demand for apartments will rebound. While those who left to buy elsewhere are unlikely to return, we think pent-up demand from last year plus deep cuts to rents will attract people back to cities. After being hit hardest during the pandemic, we expect large cities such as NYC and D.C. to outperform over the next year.
Q: So the shift to working from home doesn’t mean the end of cities?
A: No, cities are not dead! While we do expect a shift to working from home for at least one or two days a week, people live in cities for reasons more than just the convenience of getting to work. But renters will need more space. We expect the trend for ever-smaller apartments will now reverse, and converting excess office space will help that process.
Published 4th April, 2021