Or to put it another way, why didnt it happen 20 years ago or 50 years ago or 100 years ago? It seems like the underlying reasons for property being so expensive have been around, well, forever? Landlords accumulate wealth, buy property, use property to generate more wealth, property stock declines and property prices go up? I realise thats a 5 year old’s view of capitolism but i dont have any background in economics. Id love to have it explained in more detail
In: Economics
So there are a few factors at play:
– Population growth in major cities creates greater demand. As cities grow bigger, more of a premium for land/homes closer to the center as commute times grow. You can’t create new land.
– 2008 Financial crisis caused by real estate bubble burst. This created drop in real estate values, foreclosures flooding the market, inability to finance additional real estate construction, etc. so there was a substantial reduction in new building for years after.
– COVID shook up real estate markets, as people wanted more space due to work from home, remote school, space to do more at home, etc. So the market was flooded with buyers at one time, as people who’d thought about buying or about upgrading at some point in next few years changed plans and looked to buy at once.
– At same time, potential sellers of family-sized homes in many places stayed put. Seniors didn’t want strangers bringing COVID into their homes, they didn’t want to travel to Florida or Arizona to hunt for retirement home, maybe adult kids moved back in to ride out the pandemic. Not sure how much this was US specific, or also experienced more broadly in other counties.
– But imbalance between buyers and sellers caused prices to skyrocket. Super low interest rates fueled it even further, as a buyer able to get a 3% mortgage can afford significantly more than one with a 5% mortgage and still hit same monthly mortgage payment.
– New construction couldn’t happen with any big increase, despite demand, because of raw material and component shortages/costs skyrocketing, labor shortages, delays on permitting and inspections.
– Then interest rates doubled almost overnight. All those homeowners who bought with a 3% loan or refinanced into a 3% loan were not going to move if they didn’t absolutely have to. Even buying a home with same price as one being sold could mean a significant increase in mortgage payment. So unless somebody has to relocate for a job, had twins and lives in a tiny condo, or somebody died, homes aren’t hitting the market. Even as lower interest rates have cut demand some and have cut buyers’ buying power, the supply has fallen even more so the supply/demand is still imbalanced with too little supply.
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