Global boom in house prices becomes a dilemma for central banks

Surging house prices across much of the globe are emerging as a key test for central banks’ ability to rein in their crisis support.

Withdrawing stimulus too slowly risks inflating real estate further and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic.

With memories of the global financial crisis that was triggered by a housing bust still fresh in policy makers minds, how to keep a grip on soaring house prices is a dilemma in the forefront of deliberations as recovering growth sees some central banks discuss slowing asset purchases and even raising interest rates.

Federal Reserve officials who favour tapering their bond buying program have cited rising house prices as one reason to do so. In particular, they are looking hard at the Fed’s purchases of mortgage-backed securities, which some worry are stoking housing demand in an already hot market.

In the coming week, central bankers in New Zealand, South Korea and Canada meet to set policy, with soaring home prices in each spurring pressure to do something to keep homes affordable for regular workers.

New Zealand policy makers are battling the hottest property market in the world, according to the Bloomberg Economics global bubble ranking. The central bank, which meets Wednesday, has been given another tool to tackle the issue, and its projections for the official cash rate show it starting to rise in the second half of 2022.

Facing criticism for its role in stoking housing prices, Canada’s central bank has been among the first from advanced economies to shift to a less expansionary policy, with another round of tapering expected at a policy decision also on Wednesday.

The Bank of Korea last month warned that real estate is “significantly overpriced” and the burden of household debt repayment is growing. But a worsening virus outbreak may be a more pressing concern at Thursday’s policy meeting in Seoul.