The Economist (2022-01-08)

62 Finance&economics TheEconomistJanuary8th 2022

citylivingandrisingwagepremiaforedu­

catedworkersincities.By 2019 American

realhousepriceshadprettymuchregained

theirpre­financial­crisispeak,furtherevi­

dencethatthemaniaofthemid­2000swas

perhapsnotquitesomadafterall.

Fundamentalforcesmayonceagainex­

plainwhyhousepricestodayaresohigh—

andwhytheymayendure.Threeofthem

stand out: robust household balance­

sheets; people’s greater willingness to

spendmoreontheirlivingarrangements;

andtheseverityofsupplyconstraints.

Takehouseholdsfirst.Incontrastwith

some previous housing booms, well­off

folkwithstablejobshavedriventhesurge

inprices. In Americathe averagecredit

score forsomeone takingout agovern­

ment­backed mortgage is around 750—

consideredprettygoodbymostpeople’s

standardsandfarhigherthanbeforethefi­

nancialcrisis.Intheeuroareabankssig­

nificantly tightenedcredit standardsfor

mortgagesin 2020 (thoughtheyhaveun­

donethatalittlesincethen). Formany

people getting a mortgage has become

harder,noteasier.

Peoplearealsolessvulnerabletorising

interestrates—andthuslesslikelytobe

foreclosedon,whichoftenleadstofire­

sales and drags down prices—than you

mightthink.Inpartthisisbecauserates

are rising froma low base. In America

mortgage­debt­servicepaymentstakeup

about3.7%ofdisposableincome,thelow­

estfigureonrecord.Butitisalsobecause

other countries are following America

downthefixed­rate­mortgagepath,which

intheshorttermprotectspeopleagainst

increasesinborrowingcosts.InGermany

long­termfixedproductsaretwiceaspop­

ularastheywerea decadeago.InBritain

almostallnewmortgagesarefixed­rate,

withfive­yeardealsnowmorecommon.

Accordingto uk Finance, a trade body,

nearlythree­quartersofallmortgagebor­

rowerswillintheneartermbeunaffected

bytheBankofEngland’srecentraterise.

Shiftingpreferencesarethesecondrea­

sonwhyglobalhousepricesmaystayhigh.

Morepeopleareworkingremotely,mean­

inggreater demand forat­homeoffices.

Otherswantlargergardens.Thisracefor

spaceexplainsabouthalfoftheriseinBrit­

ishhousepricesduringthepandemic,ac­

cordingtoanalysisbytheBankofEngland.

Transactions involving detached homes

haveincreased,forinstance,whilethose

for flats have declined. Across the rich

worldhousehold­savingratesstillremain

unusually high. That may have allowed

peopletoinvestmoreinproperty.

Thethirdandmostimportantreason

why house prices could remain high is

housingsupply.TheEconomist’s analysisof

national statistics and archival records

findsthatintheyearsbeforethepandem­

ic,housebuildingintherichworld,once

adjustedforpopulation,hadfallentohalf

its level of themid­1960s (see chart 2).

Housingsupplyhasbecomeevermore“in­

elastic”:increasesindemand forhomes

havetranslated moreintohigherprices,

andlessintoadditionalconstruction.

Inmanyplacesthepandemichasdealt

a furtherblowtosupply.Duringthefirst

waveofcovid­19somegovernmentsforced

builderstodowntheirtools.Inthesecond

quarter of 2020 Italian housing starts

droppedbyaround25%;inBritaintheyfell

byhalf.Eveninplaceswherestay­at­home

orders weremilderandzoninglaws are

loose,suchasTexas,thepaceofextrade­

mandwassorapidthatbuilderscouldnot

keepup,sloweddown,forinstance,bythe

limitednumberofcarpenters.

Shortagesofmaterialsandlabourhave

addedtotheconstraints.Buildersaregrap­

plingwithhighercostsanddelaysforraw

materialssuchascement,copper,lumber

andsteel,anda scarcityoftradespeopleis

pushingwageshigher.Thebumperearn­

ings and improved margins of some

housebuilders suggests that many have

beenabletopassoncostincreasestobuy­

ers.DRHorton,America’slargesthome­

builder,saidtheaveragesalespriceofits

homesshotupby14%in2021,contributing

to78%growthinearningspershare.

Somesupplybottlenecksmaynowbe

easing.InOctobertheimfnotedthatglo­

balhousingstartsperpersonhadbegunto

pickup,thoughtheywerestill“considera­

blybelowthelevelsoftheearly2000s”.But

theworldhasa longwaytogo.InMay 2021

researchers at Freddie Mac, a “govern­

ment­sponsoredenterprise”whichsubsi­

disesmuchofAmericanmortgagefinance,

estimatedthattheworld’slargesteconomy

faceda shortageofnearly3.8mhomes,up

from2.5min2018.Otherestimatesputthe

shortfallcloserto5.5m.InEnglandanesti­

mated345,000 newhomes peryear are

neededtomeetdemand,butbuildersare

further away fromthe target than they

have ever been. Unless something pro­

found changes, pricey property may be

aroundfora whileyet.n

Where have all the builders gone?

Houses built per 1,000 people

11 advanced economies

Sources: UN; World Bank; ABS; European Mortgage

Federation; OECD; US Census Bureau; Destatis; DLUHC;

JapanStatistics Bureau; SDES; ECB; Istat; HUD; SCB;

Statistics Austria; The Economist

2

12

9

6

3

0

20102000908070601950

Sustainableinvesting

Gold standard

H

ours beforeBrussels entered 2022, a

bombshell  dropped.  In  a  draft  sent  to

eucountries,  the  European  Commission

proposed  classing  some  nuclear  and  gas

projects  as  green  in  its  “taxonomy”,  a list

meant  to  define  sustainable  investing.

Austria  threatened  to  sue;  Germany  cried

foul  (see  Europe  section).  The  plan  is  still

likely to win majority support from mem­

ber states, which have until January 12th to

opine.  It  could  set  the  terms  for  green  in­

vesting  well  beyond  Europe.  But  will  it

steer capital towards deserving projects? 

The  idea  emerged  after  the  2015  Paris

climate deal, when the eu’s effort to craft a

common  green­bond  standard  for  cor­

porate and sovereign issuers revealed that

members did not agree on what counted as

green.  Some  countries  have  since  worked

on their own classifications, but Europe’s,

which maps swathes of the economy over

550 pages, is the most comprehensive. 

The taxonomy hopes to end the practice

of greenwashing and boost investors’ faith

in  sustainable  assets.  It  will  offer  a  com­

mon  set  of  criteria  that  investors  and

banks  can  use  to  screen  potential  invest­

ments.  Most  money  managers  already

have their own teams and tools to measure

greenery.  But  the  lack  of  a  shared  bench­

mark means scorecards remain subjective

and  inconsistent  across  the  industry,

which confuses investors. Having a dictio­

nary where they can look up whether an in­

vestment can be labelled green puts every­

one on the same page.

Another aspect of the plan is to link the

taxonomy to disclosure. Starting later this

year,  some  11,000  listed  European  firms

will have to report how much of their sales

and  capital  expenditure  fits  within  the

classification  (the  number  of  businesses

covered will eventually expand to 50,000).

Since  January  1st  asset  managers  must  al­

ready  detail  what  share  of  the  products

they  label  sustainable  is  compliant  with

the bits of the taxonomy that are already in

force.  From  2024  most  European  banks

will also have to report a “green asset ratio”

using the same criteria. All this should put

more and better climate­related data in the

public domain. “It is our best hope globally

to measure how much money is going into

activities aligned with net zero”, says Dan­

iel Klier of Arabesque, an asset manager.

Eventually  the  classification  will  also

underpin  eucertifications  for  securities

issuers,  creating  a  direct  link  with  capital

The eu’s green labelling scheme

could go global