KAROO NEWS - We all need to live somewhere and as human beings, we tend to place a huge emphasis not just on having a house but having a home.
It is always an emotive topic, and history shows that few things get people as animated as a bull market in house prices.
Unfortunately, history also shows that few things are as likely to cause a financial crisis as an overheated housing market (the other major culprit is excessive borrowing in a foreign currency).
The 2008 global financial crisis (GFC) famously had its roots in low-quality (‘subprime’) US mortgages.
Therefore, housing matters for the real economy, financial markets and policymakers, and as interest rates rise, it is one of the key sectors to keep an eye on.
It is not just about whether housing markets will slow as interest rates rise, but also whether there has been a large build-up of debt among either households, banks or developers that can cause a major crisis.
Housing is in fact probably the main channel through which interest rates historically impacted the economy and, indirectly, inflation.
If interest rates go up, all else being equal, people spend a larger share of income on interest payments and there is less to spend on other things, putting downward pressure on prices.
When house prices rise, people often feel wealthier and spend more. The reverse is also true. Income growth of those involved in housing (from design to construction to sales) will also rise and fall with the housing market, with the same impact on inflation.
The same can be said for vehicle sales and other interest rate-sensitive items, but housing dwarfs them all.
In the US consumer price index, for instance, housing accounts for a whopping third as actual rents paid by tenants and the implied rent homeowners pay themselves.
Working from anywhere
One of the major impacts of the Covid shock, unexpectedly, was to boost demand for housing as the link between work and physical location was broken.
Ultra-low interest rates helped of course. This saw house price increases across several markets, though in some (such as Sweden and New Zealand) it was just a continuation of pre-existing boomy conditions.
In fact, in some countries and regions, rather than being welcomed, surging house prices have become a political issue as many feel they are excluded from homeownership.
