Blame the demand-side for soaring property values

The housing industry and policy makers tend to blame a ‘lack of supply’ for soaring property prices. They claim that unaffordable housing is caused primarily by restrictive planning and sluggish construction rates, and if these were eased then prices would fall and homes would become affordable.

A new paper from the Federal Reserve challenges this view, claiming that the rapid growth in US property values has been caused by a strong uplift in demand:

During the COVID-19 pandemic, the housing market has tightened considerably. Figure 1 shows that the months’ supply of homes for sale has fallen to historically low levels. Related to this tightness, the figure also shows that house price growth has increased substantially during the pandemic. The tighter housing market could reflect increased demand (higher inflow of buyers to the market), reduced supply (lower inflow of sellers to the market), or some combination of the two. On the demand side, the pandemic forced households to spend more time at home and this increase in demand for housing services may have drawn buyers into the housing market. Lower interest rates likely also stimulated housing demand. At the same time, homeowners could be reluctant to list their home for sale during a pandemic, which could have reduced the for-sale supply. Generous mortgage forbearance programs and the foreclosure moratorium may also have reduced supply, among other factors.

In this note, we decompose the increase in housing market tightness during the pandemic into generic demand and supply factors. We find that 93 percent of the decrease in months’ supply to date is driven by higher demand. Outside of a brief shock at the beginning of the pandemic, reduction of supply was a minor factor relative to increased demand in explaining the tightening of housing markets. Moreover, we show that new for-sale listings would have had to expand by 20 percent to keep months’ supply and the rate of price growth at pre-pandemic levels given the pandemic-era surge in demand. This would be a very large expansion in new for-sale listings: over the last several years, total annual new listings have not changed by more than a few percent. Absent a cooling in housing demand or a substantial increase in new for-sale listings, the housing market is likely to remain very tight in the short run…

This analysis indicates that the housing market has tightened primarily because of a surge in demand. Consequently, the relaxation of any pandemic-caused supply-side constraints will likely do little to cool the market. New demand has exceeded even pre-pandemic levels of supply, and the gap is too large to be realistically filled by new construction in the short term.

This analysis makes sense and applies to Australia as well. Prices here have surged despite a sharp collapse in immigration:

Population growth is going down while dwelling construction has lifted.

Listings in Australia have collapsed as well – down around 27% from their five year average:

Total listings

But this is because buyer demand has lifted strongly, with sales up a whopping 43% from the five year average:

Sales volumes

When it comes to property, the ability to leverage into a cheap mortgage trumps all other drivers.

Unconventional Economist


  1. Hugh PavletichMEMBER

    New Zealand’s hyperinflating housing hell: Days of destructive cheap and easy mortgage money drawing to a close …

    … When can we expect the ‘foundation problems’ of land supply and infrastructure debt financing to be effectively dealt with, to actually JUST ALLOW affordable new housing to be built ? …

    … The Reserve Bank cannot be expected to build affordable new housing …

    With swap rates rising relentlessly and an expected OCR hike due tomorrow, New Zealand’s larges mortgage lender has hike fixed home loan rates across the board … David Chaston … Interest Co NZ

    ANZ has front-run the expected OCR hike with home loan mortgage rate increases, effective today.

    It has raised its one-year fixed rate ‘special’ by 14 bps to 2.69%, its eighteen month fixed rate by 15 bps to 2.89%, and its two and three year fixed rate ‘specials’ by 10 bps each to 3.05% and 3.25% respectively.

    ANZ last tweaked rates generally higher just 13 days ago.

    ANZ fixed rate mortgage ‘specials’ are available to customers with a minimum of 20% equity and an ANZ transaction account with salary direct credited. Otherwise standard interest rates apply which are 60 bps higher.

    ANZ may be front-running the RBNZ (just as ASB did prior to the last OCR review), but in reality they are responding to wholesale rate rises. You can see the recent activity in the interactive chart below which shows relentless rises across the one, two and three year swap rates recently…. read more via hyperlink above …
    Govt signs off on DTI measures, which will be implemented; RBNZ also to tighten LVR rules from October; RBNZ says it ‘hasn’t seen sufficient reduction in risky lending’ … David Hargreaves … Interest Co NZ
    Calculate where house prices have to be in your area when it is restored to an affordable rating of 3.0 times gross annual household income / median multiple …

    Median Multiples – Interest Co NZ
    Simply bonkers: House prices now 10.5 times median disposable income, ANZ economists say … Tamsyn Parker … New Zealand Herald

  2. Is there a way to determine how many properties governments have bought for social housing in the last year? Wondering if that shows an increase compared to previous years and adds to the demand.

  3. The supply side wears as much blame in Australia. The developers hold hectares off market and then blame all and sundry when demand kicks in. Ministers are being harassed in multiple states to speed up the approval process. While I’m sure it isn’t perfect it’s the same as me blaming a book not being in the library the day before my assignment being due.

    If they want the benefit of keeping prices high by witholding land from market then they can get over missing out on this rush. It’s not as if they haven’t made out like bandits over the last few decades while doing their bit to wreck the housing market.

  4. Professor Demography

    It only takes a few people with access to credit to bid up a house and then the amount they can bid and compete with each other is the maximum loan amounts which are determined by interest rates and lending settings. These amounts may be very similar no matter what the immigration rates are. Immigration rates probably have a longer term effect in making sure there is a pipeline of the minimum number of competing bidders and renters on hand to keep the whole credit/payment/investment equation running.

    • blacktwin997MEMBER

      Eleventy was quite the expert in supplies, even has the busted lap band to prove it.

  5. I have two words for you “Moral Hazard”
    If your actions have no consequences than why not bid to the moon?
    What is the price of anything if you know that you’ll be rescued from whatever foolishness you commit to?
    Hmmm no cost for you personally but maybe there is a cost to be paid by those who value thing like Integrity. Maybe these people who believe that they shouldn’t commit to financial obligations which they really don’t have the ability to repay (and not based on insanely low interest rates of the last 10 years but rather based on historical interest rate mean).
    It is clear that someone pays for this foolishness, we’re just lucky that in Australia it is not the bidding fools themselves who but rather those too foolish to see just how rigged the game of Aussie RE actually is.
    A massive reset can’t come soon enough for my liking (and I’m an old fart) I just can’t imagine why any young person (with integrity) remains interested and engaged in this project we call Australia. My only advice to the young is to open your eyes and see that basic shelter (aka housing) is a rigged game. With that in mind join the throngs of Aussies who deep down know that one day they’ll need to be bailed out. Without doubt this is still good advice but what kind of a country are we running when this is the best advice that an old fart can give to a youngster?

    • working class hamMEMBER

      You’re right.
      As much as anyone claims, “whocoodanode”, a lot of people actually prepare for such market shocks like Covid. But the reset didn’t happen, with all the over leveraged [email protected]#s bailed out by the Govt. A bailout for the banks, investors, those owing 8x salaries, developers, REA and anyone else Tied to the property “Game”.
      Why would anyone be worried about a crash, when they have been rescued every time since 2000?

      • Jumping jack flash

        Barely a rescue. All it did was kick us back onto the 2019 slow melt path, rather than a fast crash.
        That’s not a rescue.

        • working class hamMEMBER

          Compared to the bcnich level, soup van utopia, that we would’ve ended up in without any Govt intervention, I’d say that’s a rescue?
          Every time they lower rates, that’s a rescue. Every time they relax lending standards, introduce FHB initiatives, pump building grants, allow SMSF’s to leverage into residential, etc. is a rescue back to the status quo 19′ slow melt.
          If a market is so overblown, that it can’t even maintain itself, without Govt policy and stimulus, I would say that it is permanently in a state of rescue, just waiting for someone to eventually turn off the tap.

  6. rinsing interest rates will take care of the demand issue.
    US 10 year 1.25, it’s had a few goes down here at 1.20, touched 1.13 intraday & nice test up to 1.38
    circa 1.20% will be the low & it’ll be a steep rise up to 3% this year in the US 10 year & Australian 10 year bond yield.
    Decent out of cycle home loan rate rises directly ahead, over the next 6 months into Xmas time & early next year.
    4 & 5 year fixed rates 4% or slightly above & variable higher too
    Demand won’t be an issue, buyers will be running to the hills as they say & not to buy a home

    It’ll be interesting, the stronger income buyers have outbid the next tier lower buyer & if rates rise, that’ll reduce the 2nd tier buyers capacity even further.

    If they are 10% out of reach, you’d expect it to be 20% out of reach from current levels.

    At these nose bleed prices, it won’t take much to cut 15/20% off current prices

    I did see an interesting interview of a CEO in the housing industry in USA, he said since full opening, buyers are coming back to the big cities.

    We may see that trend once we re open

    He said rents especially have bounced back in the big US cities especially NY

    At 4% home loan rates in Australia, that’ll reduce everyone’s capacity to buy

    Next year…’ll be very hard to even get a loan, regardless of interest rates

  7. Demand is always FAR more elastic than supply: think credit and warm bodies (eg. immigration).

    Hence, the ‘tension’ (price) will almost always be due to more ‘pull’ from demand from supply.

    Further, as a process engineer, from a systems point of view, i’d also assert that demand seems to be able to expand so consistently, and so quickly, that I’m not sure that any real steady-state equilibrium between supply and demand is ever really achieved (and yet this is a core philosophical tenet for much supply-demand economic fundamentals!) – this means that price doesn’t ever really reflect the underlying balance, but only a transient state for a given point in time, in a rapidly changing system…if the rate of change slows down, however, or even plateaus then that’s when we see steady-state equilibrium really asserting itself…

    I think I just described credit-juiced bubble dynamics 😉

    My 2c

    • Gavin HegneyMEMBER

      Absolutely agree . Demand is also average number of people per household , driven by price or availability of money . Demand response time is 6 months vs supply response of 18 months and the gap in time is price growth. So don’t “fix” the planning systems or we lose capital gains would be my advice , but don’t let them fail either .

  8. Jumping jack flash

    The difference is the US did their [COVID] stimulus right whereas we had the kind of stimulus you’re having when you’re not having stimulus.

    That said, house prices rising is not all that useful for the wider economy because money generally gets “stuck” in houses and never comes back out as consumption to lift wages.

    But they did have some nice CPI figures as well, much better than ours.