Housing market activity had a strong end to 2021, with sales and starts both rising. However, after a brief dip due to concerns over Omicron, mortgage rates resumed their upward trend and reached a nine-month high by the end of the year. A further rise in the 10-year Treasury yield means mortgage rates will rise further over the next few weeks. With lenders unlikely to significantly loosen credit conditions that will stretch affordability and cool the market. Indeed, there are now signs that house price growth is slowing and we expect it will fall from around 19% y/y now to 3% by end-2022. A surge in rental household formation is supporting demand, driving down vacancy and boosting rental growth. That has in turn attracted investors into the apartment sector, pushing yields to record lows and multifamily building permits to a 35-year high. Total returns will be a healthy 10% p.a. this year, before a gradual rise in yields pushes returns down to around zero by end-2025.
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