Booming house prices add to inflation concerns

Abstract

▪ Rapid house price rises are feeding into a broader asset price boom that's the strongest in decades and also unusually synchronised across assets. This trend has potentially large macroeconomic effects. Recent asset booms haven't generally been inflationary, but the current one, alongside other upward pressures on prices, adds to the need for central bank vigilance. ▪ House prices are growing at over 10% y/y in many major economies, with real prices across the advanced economies climbing at the fastest pace since the peak of 2005. The housing surge is part of a broader asset boom encompassing stocks and commodities. US stocks already looked overvalued before the pandemic, but the current asset price surge is the biggest in decades and also unusually synchronised across assets. ▪ The asset price boom has potentially large impacts on spending. We forecast US household wealth will rise around 20% this year, a record pace, which could add about 2% to consumer spending. The impact on consumption could be boosted by a revival in home equity withdrawal visible in the US and UK. ▪ Rising asset prices could also be an indicator of inflation risks, especially in the context of loose monetary conditions and other upward pressures. The historical experience is mixed, with asset booms sometimes associated with high inflation but not consistently so. ▪ Well‐anchored inflation expectations cut the risk of asset inflation spilling over to price inflation, but loose monetary conditions could push asset prices even higher, risking an eventual sharp correction. For central banks, neither this outcome nor persistently higher inflation are attractive prospect.