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ANALYSIS-The Housing Boom, Central Banks, and the Inflation Conundrum

By Sujata Rao

LONDON, Apr 21 (Reuters) – The multi-year boom in house prices around the world, which even a pandemic has failed to stop, is forcing central banks to confront a tricky question: what should they do? , if they should do something about it?

Increasing property values, from Australia to Sweden, are often well viewed by governments as a form of wealth creation. But history also shows the risk of destabilization of the bubbles and the high social cost that millions of people cannot access to housing.

The irony is that while cheap money created by low or negative interest rates has driven home price rises, they barely figure in central banks’ inflation calculations, one of the main drivers of their monetary policy.

Housing costs, be it rent or repairs, are assigned a variable weight in inflation rates, ranging from 40% or more in the United States to 6.5% in the euro zone, but the value of the home itself is left out. As they spiral upward, many argue that this is no longer sustainable.

“The debate about whether we are reflecting inflation appropriately will emerge more and more. House prices will start to get a lot of attention,” says Manoj Pradhan, co-author of a book called The Great Demographic Reversal, which predicts a resurgence in global inflation in the coming years.

Residential property prices around the world have risen 60% in the last 10 years, according to a Knight Frank index. In 2020, even as COVID-19 choked the global economy, they rose an average of 5.6%, with jumps of 20% to 30% in some markets.

While low interest rates have long been the main driver of the rebound, existing government subsidies for home purchases and, more recently, pandemic-era aid such as suspension of property taxes have also been factors.

Many of these one-off supportive measures will begin to wane, but governments are often reluctant to take politically complicated measures to maintain firmer control over prices, such as banning multiple ownership or easing building regulations.

This raises the question of what central banks can do.

FIRST WALK

The New Zealand government fired the first salvo in February, when it told its central bank to consider the impact of interest rates on house prices, which soared 23% last year.

A SLEEPING INFLATION

Ultimately, these policy changes can be risky amid the uncertainty created by the pandemic.

Adding house prices to CPI indices just as long-dormant inflation finally wakes up could send readings skyrocketing, increasing pressure on central banks to tighten monetary policy even as economies are weak. healing from the wounds of the pandemic.

Some analysts, such as those at ING Bank, predict that, with a few exceptions, housing rallies could begin to cool off as support measures introduced during the pandemic are phased out.

Citizen anger may even lead governments to attack property investors with higher taxes, as New Zealand did in late March.

Opponents of central banks expanding their housing aid say a more restrictive policy could even exacerbate the problem by reducing the supply of housing.

George Washington University professor Danny Leipziger argues that housing markets are cooled more effectively by regulation and by measures outside the purview of central banks, such as higher capital gains taxes and higher capital gains. housing supply.

“I have no problem with the ECB adding rental or homeowners costs to its basket,” Leipziger said. “But if I am concerned about house prices in Berlin or Madrid, asking the ECB to take care of it is not the right way to go.”

(Additional reporting by Dhara Ranasinghe and David Milliken; Edited in Spanish by Javier López de Lérida)

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