As a company, our efforts are focused on the domestic mortgage and real estate market. However, I thought it would be worthwhile to examine the current real estate market from a global perspective, especially considering increasing talks of a U.S. home price bubble.
Figure 1 below shows quarterly home price indices for a geographically diverse number of countries where sufficient historical home price data is available. The most recent Q1 2021 values are a combination of actual and preliminary estimates. I wanted to run the data starting from the year 2000 so that a longer term comparison can be made of each county’s home price performance. Each home price series has been indexed to its 2000 Q1 value to more easily see the price change since that time.
Note the very wide range of values, with Japan actually being down 17.5%, while New Zealand is highest at up 380.9%. Following New Zealand are Canada at 286% and Australia at 279.%. The U.S. is fifth place at 131.3%, which is slightly ahead of South Korea.
Viewed in this global context, it is difficult to make the case that U.S. home prices are significantly extended. In fact, they have increased at an annualized rate of about 4.1% since 2000, which is about 2% over the inflation rate. In fact, going all the way back to 1968 when the existing home price data was first available, the average annual appreciation rate has been about 5.4%, which is approximately 2.5% above the average inflation rate over this same period.
Regarding home price bubbles, there are several indicators which are used to compare prices with underlying fundamental factors, such as median household incomes and rents. Based on Figure 1, the countries which appear to have the most extended home prices are New Zealand, Australia, and Canada. Recent home-price-to-household-income and home-price-to-rent ratios show U.S. levels approximately half those of these three countries, which suggests that they are much more overvalued from both relative and absolute points of view.
Much of the recent concern about home prices is their dramatic increases over the past year after the onset of the COVID-19 pandemic. As seen in Figure 2, which shows the 2021 Q1 price percent change over the past year, several countries did see large gains, led by New Zealand at 20.1%, followed by the U.S. at 12.6%, South Korea at 11%, Germany at 10.3%, Australia at 9.1% and Canada at 9%.
Figure 3 shows the quarterly annual home price percent changes for the same period for the various countries. As seen, most all have exhibited varying degrees of historical volatility, with the recent price moves being quite typical of previous upcycles.
In conclusion, U.S. home price performance since 2000 falls approximately in the middle of a diverse range of global housing markets. The recent sharp increase in U.S. prices since the beginning of the pandemic is significant, but not out of the ordinary relative to previous increases. Based on the data, talk of a U.S. home price bubble seems exaggerated at this time. While we do expect home price increase to moderate, the combination of the very low inventory of homes available for sale coupled with a favorable mortgage rate environment should be supportive of the U.S. housing market in the near to intermediate term.