Global boom in house prices makes life tough for central bankers

12 July, 2021 12:00 AM printer

NEW YORK: Surging house prices around the world are emerging as a key test for central banks’ ability to rein in their crisis support.

Withdrawing stimulus support measures too slowly risks inflating property prices further and worsening financial stability concerns in the long term. However, pulling back too hard could unsettle markets and send property prices lower, threatening the economic recovery from the Covid-19 pandemic, report agencies.

With memories of the global financial crisis that was triggered by a housing bust still fresh in the minds of policymakers, how to keep a grip on soaring home prices is a dilemma at the forefront of deliberations as some central banks discuss slowing asset purchases and even raising interest rates amid recovering growth.

US Federal Reserve officials who favour tapering their bond-buying programme have cited rising house prices as one reason to do so. In particular, they are looking hard at the Fed’s purchases of mortgage-backed securities, which some worry are stoking housing demand in an already hot market.

In the coming week, central bankers in New Zealand, South Korea and Canada meet to set policy, with rising home prices in each mounting pressure on them to do something to keep homes affordable for regular workers.

New Zealand policymakers are battling the hottest property market in the world, according to the Bloomberg Economics global bubble ranking. The country’s central bank, which meets on Wednesday, has been given another tool to tackle the issue, and its projections for the official cash rate show it starting to rise in the second half of 2022.

Facing criticism for its role in stoking housing prices, Canada’s central bank has been among the first from advanced economies to shift to a less expansionary policy, with another round of tapering expected at a policy decision meeting, also on Wednesday.

The Bank of Korea last month issued a warning that property is “significantly overpriced” and the burden of household debt is growing. However, a worsening virus outbreak may be a more pressing concern at Thursday’s policy meeting in Seoul.

In its biggest strategic rethink since the creation of the euro, the European Central Bank this month raised its inflation target and in a nod to growing housing pressure, officials will start to consider owner-occupied housing costs in their supplementary measures of inflation.

The Bank of England last month expressed its discomfort with the UK housing market. Norges Bank is another authority that has signalled that it is worried about the effect of ultra-low rates on the housing market and the risk of a build-up of financial imbalances.