Rising house prices, mostly a concern for US inflation

In Short

The extraordinary monetary stimulus implemented after the Covid-19 outbreak brought about a strong support to asset prices via abundant liquidity and tumbling real rates.
Focal Point

Highlights:

  • Record low interest rates and central banks’ support to lending are pushing house prices up in most OECD countries. By
    some metrics, in some countries residential real estate overvaluation is at its highest level in 25 years. The reshuffle in
    demand following changing working patterns may add further pressure.
  • US valuations are high by historical standards, but below the mid-2000 levels. Tighter lending discipline and stronger
    households balance sheet reduce the risks to financial stability. Yet soaring prices impact the important shelter component
    of CPI, which may dampen the inflation normalization expected for 2022, increasing pressures on the Fed to tighten.
  • In its latest Stability Review the ECB deemed the housing market-related risks as “elevated”. In its new strategy the ECB
    will also directly focus on house price developments by augmenting its inflation measure accordingly.
  • Taylor-rule based calculations show that if house prices were fully included, the policy rate would currently be 0.3 pp higher.

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Vincent Chaigneau

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