Why Home Prices Keep Rising (Official Data)

7. What actually sets the price of a home

For most people, a home is their biggest purchase. Here is why home prices rise, in seven parts. Number seven: what actually sets the price of a home? Demand and supply are the starting point, an IMF back-to-basics article says.

Income and population growth boost demand, and unless supply keeps up, prices continue to rise. Economists recognize that housing is different from the other products people buy. A home is a major, long-lasting purchase and investment, usually financed by borrowing. Real prices are home prices adjusted for inflation, and this video uses those published by the Bank for International Settlements, or BIS.

Where and how you can buy a home differs from place to place. Demand comes first, and number six shows what drives it. Subscribe for the next parts of this series: every source here is the IMF or the BIS, linked below.

6. What makes more people want homes at the same time

Number six: what makes more people want homes at the same time? Many people aspire to own their own home, the IMF's back-to-basics article begins. Unlike other assets, housing has a social side as well, an IMF article on affordability notes. Interest rates, income and population growth drive the demand side, an IMF blog adds.

Because homes are usually bought with loans, demand is sensitive to the availability and cost of mortgage credit, the back-to-basics article says. Demand is also sensitive to expectations about future prices. Housing markets are increasingly shaped by forces beyond country borders. Capital from foreign buyers is boosting housing demand in many countries.

One driver it names is the historically low interest rates between 2,008 and 2,021, which sent investors toward property. Rising wealth, especially in emerging markets, is another driver it lists. Some buyers also treat certain housing markets as a safe haven for their money. After the pandemic, robust demand as new households formed kept prices high, the affordability article says.

Buying rules and taxes vary from place to place. Borrowing costs come next, and number five puts a number on them.

5. How much do interest rates move home prices

Number five: how much do interest rates move home prices? Before the rate rises it describes, falling interest rates lowered the cost of borrowing and lifted housing demand, the IMF blog says. Its rule of thumb, from evidence across countries: each 1 rise in real interest rates slows home price growth by about two points. In the tightening it describes, policy rates had risen four points on average across major economies by March twenty twenty-three, to pre-crisis levels.

Central banks raise policy rates, mortgage rates follow, and home loans get more expensive, the back-to-basics article explains. But policy rates also reach every other part of the economy, so the article calls them a blunt tool for housing. Home prices are very sensitive to changes in interest rates, partly through expectations about future returns, an IMF article on housing and rates says. That can change how much buyers are willing to borrow, and for how long.

Rates move home prices more where housing supply is restricted. Slimmer supplies boost prices, the article says. For homeowners with adjustable-rate mortgages, rate changes directly affect monthly payments. Fixed-rate mortgages, by definition, do not adjust when policy rates change.

So the more fixed-rate loans there are, the fewer borrowers feel rate rises, or benefit from rate cuts. History shows rate rises are generally more powerful at cooling booms than similar rate cuts are at lifting demand. As rates fall, more households may enter the housing market, increasing demand and pushing up prices, the affordability article notes. Over the half century it studied, changes in mortgage rates accounted for just over a quarter of the movements in affordability.

Mortgage types and their rules change from place to place. Rates move demand, and supply is the slower half: number four shows why.

4. Why can't builders simply add more homes

Number four: why can't builders simply add more homes? Even under the best circumstances, it takes time before housing supply catches up with demand, the back-to-basics article says. Building a house requires financing, permits and approvals, then a lengthy construction period. Other regulations and zoning requirements add considerably to that delay.

In the pandemic, prices surged in many economies on a mix of demand and supply, including limits on construction, the affordability article notes. Two economists cited in the back-to-basics article show that land-use limits restrict density, curbing supply and driving up prices. In heavily regulated cities, home prices can soar beyond what it costs to build them. By contrast, some cities with light rules and ample land have plenty of affordable homes, it adds.

Building codes and land-use rules are often there for good reason, such as keeping up quality-of-living standards, the affordability article says. But they can also become overly burdensome. In one example the back-to-basics article gives, authorities are cutting permitting times, freeing up unused land and tackling a shortage of construction workers. It will, however, take time for those measures to work.

High house prices can be largely explained by the simple fact that there are too few houses for sale, the article says. Permit and zoning rules change from one place to the next. That's four of the seven: what sets the price, what drives demand, borrowing costs, and slow supply. Next, how loans and home values can push each other up.

3. How can rising prices push prices even higher

Number three: how can rising prices push prices even higher? As home prices climb, the value of homes pledged to lenders as collateral rises too, the back-to-basics article says. That can lead banks to extend more credit, further lifting the housing market. A relaxation in lending standards can give prices a strong boost, as before the global financial crisis.

To manage credit, regulators can require a minimum down payment and cap loan payments relative to income. After the global financial crisis, many supervisors tightened these rules for housing loans, the IMF article on housing and rates says. That paid off by twenty twenty, with improved creditworthiness and reduced leverage, it adds. Banks are also often heavily exposed to housing, which makes it a key channel for central bank policy.

Sharp price increases are often driven by overly optimistic views about future gains. When expectations and credit amplify demand and supply is tight, large gaps can open between the two, the back-to-basics article says. Lending rules and limits differ from one place to another. In one breath: demand and supply set prices, rates move demand, supply is slow, and credit can push prices further.

If you want to see how rising prices affect your money, the video on protecting your money from inflation is linked on screen. Prices also pause and fall, and number two shows the latest numbers.

2. Do home prices ever stop rising

Number two: do home prices ever stop rising? In the first quarter of twenty twenty-six, real global house prices fell 1.2% from a year earlier, the BIS reports. That was a faster fall than the previous quarter's minus 0.5%. It came after a period of near stabilization in the second half of twenty twenty-five.

Still, the median economy's real prices rose 2.6% over the year. The overall decline was driven by only a few large economies, the BIS explains. Before adjusting for inflation, global prices still rose 1.7%, it adds. In past economic downturns, housing markets usually weakened, the affordability article notes.

During the global financial crisis, home prices fell, then slowly recovered as central banks kept interest rates low for long, it adds. Lower borrowing costs and lower prices made homes more affordable in that period. Over the past half century, the ability to afford a home has ebbed and flowed. The drivers it names are mortgage rates, household income and house prices.

When rates jumped after the pandemic, prices cooled somewhat, but much less than expected. Prices vary widely from one economy to the next, the BIS notes. Before number one, a guess: since the end of the global financial crisis, how much have real home prices risen, on average?

1. What has the key to a home been worth over the long run

Number one: what has the key to a home been worth over the long run? Over the past two decades, global house prices have markedly increased in real terms, the BIS says. They are about 20% above their level at the end of the global financial crisis. By our count, 20% over about sixteen years is roughly 1.1% a year above inflation.

Since the start of the pandemic, the rise is a much smaller 2.7%. By our count, that 2.7% works out to less than half a percent a year over those six years. So since the end of the global financial crisis, real home prices have risen, but slowly, and not every year. In the end, the basic principle of supply and demand still holds, the back-to-basics article says.

None of this predicts where any one home's price will go. Home prices, taxes and rules differ where you live. And that is why home prices rise: more people and income, cheaper borrowing, and homes that take time to build. So, seven parts: what sets a home's price, what drives demand, borrowing costs, and slow supply.

Then how credit can push prices further, why prices pause, and what a home has been worth over time. Today, you can open the IMF's back-to-basics article on housing markets, linked below. Which of the seven surprised you most? Tell us the number in the comments.

Results vary, rules differ where you live, and this is information only, not financial advice. This is Wealth Filings. If you want to see part thirteen, subscribe now: it shows how the prices you pay become one inflation number. Next on Wealth Filings, How Money Really Works, part thirteen: how inflation is measured.