Why Urban Home Prices Are Rising: Factors Behind and Policy Solutions

The global pandemic has significantly influenced housing markets, with many home buyers seeking more space and opting for suburban locations. However, a recent analysis has revealed that urban housing markets continue to perform strongly, mirroring suburban trends.

Historical Perspective on Rising Home Prices

Rapid rises in home prices are not a post-crisis phenomenon; they have been at the forefront of economic and societal transformations in almost all advanced economies since the 1980s. Recent data shows a significant concentration of expensive and unaffordable housing in urban areas, indicating a shift in the underlying causes of price appreciation.

Current Trends and Their Implications

A poll conducted by Reuters in February and March of a group of property analysts projected an average house price increase of only 2.0% for the current year and 2.5% in 2021. This represents a substantial deceleration from previous forecasts which suggested increases of 3.0% and 4.25%. Furthermore, the reported rate of consumer price inflation is about three times higher than the projected housing price growth.

Global Economic Context and Regional Differences

Asia's third largest economy, reflecting a slowdown in growth, expanded at its slowest pace in over six years during the fourth quarter of 2019. The global coronavirus outbreak is expected to further decelerate this economic activity, likely exacerbating the challenges faced by the housing market, which has remained in a slow growth trajectory.

Market Predictions and Analyst Views

A comprehensive analysis of 12 additional analysts indicated that the latest union budget would have no impact on housing market activity. Moreover, all respondents agreed that a prolonged period of sub-par housing market activity followed by a recovery was more likely in the coming year. No analysts expected a significant acceleration or deceleration in the market, underscoring the current stagnation.

Policy Proposals for More Equitable Urban Housing Markets

To address housing market volatility and enhance equity, policy proposals can focus on three key themes:

Producing More Affordable Housing Units: This can involve increasing public and private investment in affordable housing projects, such as public-private partnerships and incentives for developers to build affordable units. Better Allocation of Housing Resources: Implementing new mechanisms to allocate scarce housing resources more equitably among residents and across regions, including targeted subsidies and social housing initiatives. Reducing Speculative Elements: Emphasizing measures to curb speculation, such as higher capital gains taxes, stricter financial regulations, and measures to limit the purchase of properties by investors or non-residents.

By addressing these key themes, policy makers can aim to create more stable and equitable urban housing markets, benefiting both current and future residents.

Conclusion

While the urban housing market has shown resilience, the concentration of high and unaffordable housing in urban areas signals a need for targeted policy intervention. By focusing on increasing affordable housing, better resource allocation, and reducing speculation, policymakers can help stabilize the market and make it more equitable for all residents.