The S&P CoreLogic Case-Shiller Home Price Index is considered one of the most representative indicators of trends in the prices of residential real estate in the US.

On the last Tuesday of every month, the credit rating agency Standard & Poor’s (S&P) announces the indices for two months earlier. It calculates individual index scores for 20 major US cities, including New York, Chicago, Boston, and Los Angeles, as well as the top 20 and top 10 metropolitan areas and the country as a whole.

On Jan. 25, S&P announced its figures for November 2021. They showed US housing prices to be rising at a staggering rate.

Prices for Phoenix were up by fully 32.2% from a year earlier. For Tampa, the rate was 29.0%. Indeed, 10 out of 20 major cities had annual rates of increase in excess of 20% — compared with zero below 10%.

The national index figures showed an annual rate of increase totaling 18.8%. Over the 23-month period since early 2020, the rate of increase was 30%.

COVID-19, near-zero interest rates and housing prices

Previously, US housing prices crashed during the world financial crisis of 2007 to 2008 and slumped up until February 2012, at which point they rebounded and slowly rose. The steep increase in housing prices only began when the US Federal Reserve Board lowered its interest rates to near zero following the COVID-19 pandemic. Once at 1.75%, the Fed’s federal funds rate upper limit dropped to 0.25% in March 2020. The increase rate of US housing prices before and after this shift proved markedly different.

According to the Case-Shiller index, housing prices in the US rose by 0.46% each month on average during the eight-year period between February 2012 and February 2020. But during the 21 months after the Fed lowered its standard interest rate in response to COVID-19, housing prices increased by 1.24% on average each month — almost three times that of the pre-pandemic figure. This is a good example of how forcefully COVID-19 has affected liquidity in the housing market.

This phenomenon is not limited to the US. Housing prices have skyrocketed in major countries around the world.

Knight Frank, a real estate consultancy in the UK, releases quarterly data on housing price changes in 50 countries and cities across the world compiled with the help of partner companies. According to its reports on global home prices, housing prices started to increase following the pandemic in the third quarter of 2020, with the increase rate escalating starting from the fourth quarter of the same year. In the Group of Seven (G7) countries as well as Switzerland, Sweden, Belgium, the Netherlands, and South Korea, housing prices rose by a mere 2.8% during the year ending in September 2019, but jumped by 5.2% the following year ending in September 2020, then by a staggering 13% the subsequent year.

Of course, the figure varies by country. In Italy, for example, housing prices increased by a meager 0.4% during the year ending in September 2021. Countries with pronounced housing price increase rates during the same period include South Korea (26.4%), Sweden (20.3%), the US (18.7%), the Netherlands (18.4%), and Canada (17.3%). The figure was relatively low in countries such as Japan (8.9%) and France (7.5%).

A look at Knight Frank’s Prime Global Cities Index, which tallies housing prices in major global cities, makes it more evident that COVID-19 impacted liquidity in the housing market to heighten housing prices. According to the cities index report released at the end of the third quarter of 2021, housing prices in 46 major cities around the world rose by annual rates lower than 2% from the first quarter of 2019 to the third quarter of 2020. However, the growth rate started to increase by the fourth quarter of 2020, jumping to 8.3% at the end of the second quarter of 2021 and to 9.3% at the end of the following quarter.

The COVID-19 pandemic is still ongoing, and standard interest rates around the world remain untouched after being lowered in response to economic recessions. Nevertheless, the Fed has hinted that it will raise its standard interest rate during the Federal Open Market Committee meeting in March. Based on the Case-Shiller index, US housing prices are still in an upturn, but the rate of increase seems to be slowing. According to S&P, annual home price gains based on the Case-Shiller index continued to fall, from 19.8% in August to 19.5% in September, 19.1% in October, and 18.8% in November of 2021. Their composite of 20 cities fell for four consecutive months as well.

The US housing bubble popped once before. From 1990 onwards, US housing prices followed a gentle upward trajectory until the end of 1996, after which they jumped by 4% in 1997, then shot up to 9% in 2002 and 2003, then to 13% in 2004 and 2005. Afterward, housing prices staggered for about a year then fell into a downward trend. The subprime mortgage crisis pushed the figure to plunge even further. According to S&P, the figure nosedived by 27.4% from its height in July 2006 to February 2012. In the same period, their 10-city composite fell by 35.3% before rebounding again.

A break in the upward trend?

US housing prices skyrocketed by 106.1% from a low in February 2012 to November 2021. The figure jumped by 46.1% even compared to its peak in 2006. In terms of the rate of increase, the figure rose by 10.4% in 2020 and by 17.8% from January to November 2021. It’s as if fireworks are going off.

The Bank of Korea increased its standard interest rate by 0.25 percentage points three times starting August 2021 ahead of the Fed. However, KB Kookmin Bank’s index on the sales prices of Seoul apartments increased by 13% in 2020 and 16.4% in 2021, though the increase rate for the figure is slowly decreasing.

In his 2000 book “Irrational Exuberance,” Robert Shiller wrote that the housing bubble in the US may soon burst. Reflecting on the history of centuries past, he explained that housing prices that have mushroomed to the point consumers cannot afford them will plummet as a matter of course. Both Dean Baker, director of the Center for Economic and Policy Research, and Paul Krugman forecasted the housing market’s crash, the former saying it would happen in August 2002 and the latter in August 2005. Rational experts sometimes issue warnings that are much too early.

Both the US and South Korea are recently seeing housing prices that are rising as steeply as they did around 2006 and 2007, when they hit an all-time high. Where are we headed to right now?

By Jeong Nam-ku, staff reporter

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