Real estate market is expected to reach USD 2.21 trillion by 2022, growing at a CAGR of 6.0%. It is driven by higher preference for home ownership among millennials. Meanwhile, rental type will account for USD 1.92 trillion in 2021, and will reach USD 3.04 trillion by 2030. The next generation of renters after millennials, Gen Z, is predicted to spend more than other generations.
Interest rate increases
A new Federal Reserve report indicates that interest rates will continue to rise. The Fed is on track to raise its target federal funds rate by another half percentage point, to 2.5%. Inflation is at its highest level since the early 1980s. The new rate will put more pressure on the real estate market.
As a result, mortgage rates will increase. This will discourage many would-be buyers. However, a recent report showed that home prices are still growing. While interest rates have gone up considerably in recent years, the median price of existing single-family homes grew 15.7% in the first three months of 2022.
An inventory shortage in the real estate market can be devastating for a seller. In 2021, the housing inventory was at its lowest level ever, falling by nearly 40% – and that was with a higher number of buyers. As a result, prices for homes went up. In 2022, it’s estimated that there will be just one month’s supply of homes for sale. That’s significantly lower than the six-month supply it should have in any other year.
This shortage is caused by a number of reasons, ranging from supply chain issues to municipal zoning laws. The shortage is most prevalent in new homes, but it’s not the only factor. While housing inventory has increased in recent months, it remains low when compared to historical levels.
Millennials’ influence on housing market
Millennials will have a significant influence on the housing market in the years to come. As more of them reach the median age of 32 and become first-time home buyers, more construction will be required. That will push the total number of new homes built in the United States to two million per year, according to Jefferies, an investment bank.
The millennial generation has been known to make rash decisions, such as buying a home sight-unseen, a fixer-upper in need of major repairs, and paying over asking price. This is making the housing market in the United States one of the most competitive and lucrative in history. Historically low interest rates are also fueling the housing market, which is ripe for a boom. As a result, the housing market is expected to grow by an unprecedented 20 percent over the years from September 2020 to September 2021. This is more than twice the increase in the housing market in the years prior to the crash in 2008.
Impact of inflation on housing market
Inflation is a powerful factor that affects the housing market and real estate investment. It raises the cost of borrowing, and consequently, property values. As a result, fewer people buy mortgage-financed homes. Ultimately, this flattens economic growth. Those interested in real estate investing should consider investing in asset classes that provide protection against inflation. Inflation-protected investments are those that maintain or increase in value over time.
Inflation is a result of the increased cost of everyday goods. A long list of items is affected by inflation, including building materials. Higher costs result in higher listing prices for newly built homes. The Canadian government has tried to combat this phenomenon by increasing money supply in the economy.
Impact of government measures promoting affordable housing
President Biden has announced that his administration is going to launch an Affordable Housing Action Plan that is designed to ease the burden of rising housing costs. This plan is meant to create hundreds of thousands of affordable housing units over the next three years. It also offers downpayment assistance and rental assistance programs that will make homeownership more affordable for more people. The plan is designed to align with other government policies aimed at lowering housing costs. If successful, it will make homeownership more accessible to more people in the US.
Many governments have announced new initiatives to promote affordable housing, including a golden visa for veterans and programs for first-time home buyers. These programs are expected to boost housing supply and curb transactional taxes. However, the backlog in housing construction remains large. To close this gap, existing programs must be implemented more effectively and efficiently.