Benjamin Franklin once complained about inflation and rising housing costs, exclaiming “Rent of old houses and value of lands…are trebled in the last six years.” However, steadily rising prices often reflect a country’s economic growth and health. With real estate being the greatest source of wealth for many families, this may be a type of “good inflation” that is consistent with improving prospects for households.
- Home prices are rising globally. In the first quarter of 2021, the average annual nominal-house-price growth accelerated to the fastest pace since 1990 across the Organisation for Economic Co-operation and Development’s (OECD’s) 37 advanced economies.1
- Many nations’ government responses to the pandemic included fiscal stimulus payments and ultra-low interest rates, fueling an estimated US$2.2 trillion dollars of excess US household savings2 and lower mortgage costs for homeownership, while raising the US median price of a home.
- In April 2021, the sale price of the median home increased to a record high of US$341,600, a 19.1% year-over-year increase. However, the number of US home sales dropped -2.7% to 5.85 million, the third straight month of decline,3 as the pandemic continues to affect home sales, the building of new homes, and building material costs and constraints. Rising home prices and building material costs provide a level of cost-push inflation.4
- The pandemic demonstrated that working from home did not necessarily lead to lower productivity—workers are no longer tethered to cities, offices, or a country. Relocations away from urban hubs to new destinations have created housing dislocations and shortages that would not have been expected pre-pandemic.5 It may take a while for the new work hubs to build sufficient housing for the new world of working from anywhere.
- One key metric to watch is whether employment and wage trends keep up with these inflationary forces. If not, the home price rises may not feel so “good” anymore.
For more on how inflation globally affects investors in additional sectors, please read “Inflation, Rotation and Opportunities ” which includes nuanced outlooks by Western Asset; Glenn Voyles, Franklin Templeton Fixed Income; Aram Green and Mary Jane McQuillen, ClearBridge Investments; Matthew Moberg, Franklin Equity Group; Manraj Sekhon, Franklin Templeton Emerging Markets Equity; Brooks Ritchey, K2 Advisors; and Tim Wang, Clarion Partners.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC. Member FINRA/SIPC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC. Member FINRA/SIPC is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Past performance does not guarantee future results.
1. Source: Financial Times, “Why haven’t house prices collapsed? With economies shrinking at an unprecedented rate, house prices were expected to plummet — so why have they been surging in most western countries?” by Valentina Rome, May 11, 2021.
2. Sources: US Federal Reserve, US Bureau of Economic Analysis, and St. Louis Fed, data through March 31, 2021.
3. Source: National Association of Realtors, “Existing-Home Sales Decline 2.7% in April,” May 21, 2021.
4. Source: The Conference Board, “Consumer Confidence Index, Plans to Buy Home,” index on households’ home purchasing plans forecasts declining home sales within the next 6 months, and in May 2021, sales declined to levels not seen since February 2013. There is no assurance any estimate, projection, or forecast will be realized.
5. Sources: National Association of Realtors, “Existing-Home Sales Decline 2.7% in April,” May 21, 2021 and the U.S. Census Bureau Federal Reserve Statistical Release. For more information on housing prices by country, see “OECD Data Housing Prices” and National Association of Realtors, “Summary of April 2021, Existing Home Sales Statistics,” May 21, 2021.