Advanced-economy real estate markets: home price resilience and supply shortages

Home prices in the vast majority of advanced countries have held up better than expected during the recent cycle of interest rate hikes that began in 2022. While it is true that the tightening of financial conditions truncated the rally in home prices that followed the pandemic, overall the decline they have experienced since mid-2022 has been fairly moderate. Aggregate home prices in the major advanced economies¹⁵ fell by 4.8% between Q2 2022 and Q2 2023 in real terms, but in Q3 2023 (latest available data) they stabilised. Despite this decline, aggregate home prices in real terms are 13.2% above the level of Q4 2019 (31.1% in nominal terms).

This aggregate figure, however, hides significant differences between countries. In the US, home prices slowed in 2023 but did not fall, and they continue to reach new peaks (accumulating growth of 27.1% in real terms and 47.5% in nominal terms since Q4 2019).

The countries that experienced the greatest appreciation of home prices after the pandemic (Canada, New Zealand, Australia and the Netherlands) have suffered a notable setback from their post-pandemic highs (in New Zealand, for example, prices have fallen as much as 22% from their peak in real terms). However, despite these corrections, home prices remain significantly higher than in Q4 2019 (10.2% in New Zealand and 28.6% in Canada in real terms).

Germany and Sweden also experienced a marked increase in home prices after the pandemic (around 20% in real terms), but in both cases they are experiencing significant corrections and the latest data still show no signs of stabilisation. The country with the biggest price drop compared to Q4 2019 is Finland, despite not having experienced any significant appreciation before or after the pandemic.

In the intermediate zone we find countries such as Ireland, the United Kingdom, Denmark, Norway and France. In these countries, home prices rose by around 10% in real terms after the pandemic, and despite having fallen from their peaks, prices remain slightly above the levels of Q4 2019.

Spain’s residential market is in the lower band of this ranking (home prices in real terms have fallen around 3% from their peak). In fact, Spain, together with Italy, stands out for the relative stability of its home prices during this period, in contrast to the high volatility observed in many advanced countries.

A phenomenon that is being observed in many advanced-economy real estate markets is the shortage in the supply of new housing in recent years. This limited supply is unable to meet the persistently strong demand, above all given the recent demographic momentum observed in these countries, especially in large cities. The chart on the following page shows the supply of new housing in proportion to net household creation, and compares the recent situation (2022-2023) with the pre-pandemic period (2015-2019). We can see that in the vast majority of countries this ratio is below 1, indicating that the construction of new housing is insufficient to meet the demand generated by demographic trends. The shortage is particularly stark in the Netherlands, Ireland, Denmark, Germany, Austria and Spain, among others.

Supply tends to adjust slowly in the face of a demand-side shock, as it takes time to plan and build new developments.¹⁶ Lower supply elasticity is often associated with greater price pressures and leads to more volatile prices. The rigidity of supply can be caused by natural and geographical obstacles (mountains or sea, for example), as well as by restrictions linked to land use regulations and other related policies (such as zoning), which make it difficult to develop new housing. In this regard, the OECD¹⁷ points to the fact that regulatory supply restrictions play an important role in many OECD countries and limit the capacity of the housing supply to respond to growing demand, which contributes to the increase in prices and reduces the affordability of housing.¹⁸ These limitations are particularly binding in metropolitan areas that are already highly urbanised, where the population density is high and real estate market regulations are more prevalent.

Other factors limiting supply growth include higher construction costs and a lack of labour in the sector. Construction costs have increased by 20% between Q1 2021 and Q3 2023 in the EU, due to higher material and energy costs following the outbreak of the war in Ukraine, and this has contributed to the increase in the price of new homes. In addition, factors of a more structural nature, such as environmental and energy efficiency regulations, also contribute to the increase in construction costs. With regard to the lack of labour, industrialised construction methods are seen as a potential solution in order to attract young talent and facilitate the incorporation of women into what is a highly male-dominated sector, while also cutting build times and improving product quality and standardisation.

Finally, another factor that has limited supply is the lack of public investment in housing construction. According to the OECD, over the past two decades, transfers to non-public-sector organisations for the development of housing decreased by more than 50% on average in OECD countries, while direct government investment in developments fell by 80%.¹⁹ This lower public investment is reflected in the decline of social housing relative to the total housing stock in OECD countries, further exacerbating the affordability issue, particularly for low-income households.²⁰

To reverse this situation, it is necessary to boost the creation of new housing supply by taking action on multiple fronts: promoting the creation of land allocated for development, reducing the time it takes to grant construction permits, increasing the budget allocated to public housing policies, facilitating changes of use in existing buildings (e.g. offices in areas with low tertiary demand and high residential demand), increasing the development potential of land in areas with high demand and a shortage of space, boosting public-private collaboration to enable the construction of affordable rental housing (e.g. through concessions and land rights), making advances in industrialised housing construction methods and facilitating access to financing under favourable conditions. These measures would help to ensure that the supply of housing is sufficiently elastic so as to respond to housing needs more quickly when demand increases, without generating excessive price pressures.