At the end of 2021, things looked rosy for the global housing sector. Across the 38 countries in the OECD, house prices were growing at the fastest pace since records began 50 years earlier.
Analysis of data from Oxford Economics, a consultancy, shows a similar trend. In 41 countries, from Norway to New Zealand, house prices were rising, bolstered by record low borrowing costs and buyers with savings to spend. Arguably, there had never been a better time to own a home.
Not even a year later, and the picture is completely different. While homeowners around the world are reckoning with increasingly unaffordable mortgage payments, prospective homebuyers are facing house prices that are rising faster than incomes. In the background, a global cost of living crisis deepens.
What has changed, of course, is the spectre of rising prices and the economic shock of Russia’s invasion of Ukraine.
This fuelled a surge in inflation — now at multi-decade highs in many countries — which prompted central banks around the world to sharply tighten monetary policy. The OECD also predicts that real-term wages are likely to fall next year.
The upshot is that a pandemic-induced housing boom in the world’s richest countries is likely to be followed by the broadest housing market slowdown since the financial crash. This, in turn, could add further pressure on to flagging economies.
Now, nearly all of the countries in the Oxford Economics database are expected to experience a slowdown next year, marking the most widespread deceleration in housing price growth since at least 2000. More than half are likely to register an outright price contraction — something last seen in 2009.
“This is the most worrying housing market outlook since 2007-2008, with markets poised between the prospect of modest declines and much steeper ones,” says Adam Slater, lead economist at Oxford Economics. “The ongoing surge in mortgage rates in advanced economies threatens to push some housing markets into steep downturns.”
The IMF agrees. It warns the global housing market is at a “tipping point”.
“As central banks around the globe aggressively tighten monetary policy to tackle price pressures, soaring borrowing costs and tighter lending standards, coupled with stretched house valuations, could lead to a sharp decline in house prices,” its global financial stability report says.
This “sharp decline” will be widespread. While the FT analysis based on Oxford Economics data largely covers advanced economies, the IMF forecasts that in a severely adverse scenario, real house prices could decline by 25 per cent over the next three years in emerging markets compared to 10 per cent in advanced economies.
A housing market slowdown is also likely to depress broader economic activity, hurting the construction sector and its suppliers.
Slater predicts that the housing downturn could shave off 0.2 percentage points from global growth as a result of reduced spending and another 0.6 percentage points owing to lower residential investment.
The Bank of Canada estimates that the housing downturn will reduce economic growth by 0.6 percentage points to 0.9 per cent next year.
This dynamic is already playing out in China where a property crisis has intensified in recent months and its economy this year has grown at its slowest pace since records began in 1992, excluding the pandemic period. Housing floor space sold is down 26 per cent in the year to September compared with the same period last year.
Because the sale of properties not yet built is a major source of funding for developers, the sharp decrease as the country presses on with its zero-Covid policy has created self-reinforcing liquidity pressures and harmed the economy.
Too expensive to borrow
The biggest factor in the slowdown is undeniably mortgage rates.
In the US, the rate for a 30-year deal has stabilised at about 7 per cent, more than double the rate last year and the highest since 2008, following a quick succession of rate increases by the Federal Reserve.
Combined with the boom in house prices in the previous two years, the monthly mortgage payment on a typical property rose to more than $2,600, up from $1,700 a year earlier.
“These are rates that I think are likely to be much more of a headwind and indeed we’re seeing the housing market slow,” says Nathan Sheets, chief economist at US bank Citi.
This pattern is similar in many countries. Mortgage rates have risen to their highest level in recent years across the eurozone, as well as in Canada, Australia and New Zealand.
“With mortgage rates rising and banks holding back lending, depressing demand, we remain confident in our view that eurozone house price growth is set to fall sharply and will turn negative by the end of 2023,” says Melanie Debono, economist at Pantheon Macroeconomics.
Marcel Thieliant, economist at Capital Economics, estimates that mortgage payments in New Zealand have already soared to above 60 per cent of the median income, up from below 45 per cent before the outbreak of Covid-19.
With interest rates set to rise further, he forecasts a 25 per cent fall in New Zealand’s house prices from their peak in November.
In the UK, the mortgage market has been sent into turmoil by the political crisis triggered by the large tax cuts proposed by Liz Truss’s shortlived government. Markets have calmed down with the appointment of Rishi Sunak, the new prime minister, but interest rates are still expected to rise to about 4.6 per cent next year from the current 3 per cent.
The Resolution Foundation, a UK think-tank, calculated that for nearly a fifth of households, mortgage payments could shoot up by more than £5,000 a year by the end of 2023.
As a result, economists forecast a 2023 UK housing price crash varying from 4.4 per cent for Oxford Economics to 10 per cent and 12 per cent for the real estate agent Savills and the consultancy Capital Economics, respectively.
The rise in mortgage rates reflects the increase in policy rates that have risen sharply as many central banks battle the fastest pace of inflation for decades. The US, the UK and the eurozone combined have increased rates by nearly 900 basis points over the past year, with markets expecting another 400 basis points increase by summer next year. Most emerging markets have seen even steeper rate rises. Brazil has aggressively pushed up rates to 13.75 per cent from only 2 per cent in January 2021 and, in Hungary, there was a 12.4 percentage points increase to 13 per cent.
“Our rough rule of thumb has been that every 100 basis point increase in policy rates leads to a decline in house price growth of one-and-a-half to two percentage points,” says Prakash Loungani, adviser in the research department of the IMF.
The European Central Bank calculates that in a low interest rate environment, a 1 percentage point mortgage rate increase corresponds to roughly a 9 per cent decline in house prices and a 15 per cent decline in housing investment after about two years.
As the financial pressures on households increase, the savings accumulated during the pandemic that helped support the housing boom are rapidly depleting. Not only can households buy less with their money, they are more likely to struggle to save for a deposit.
In the US, “the rising cost of living and falling equity markets have made it more challenging to save enough of a downpayment for first-time buyers — the lifeblood of the market,” says James Knightley, economist at ING.
What strength there is in the housing market in part reflects buyers rushing to lock in mortgage deals before rates increase further. Rent prices also remain strong, because of steady demand from those unable to afford to buy a property.
In many countries, house prices are being maintained by low housing stocks. In October, the UK stock of property for sale for each surveyor was the lowest since records began in 1978, while inventories remain low by historical standards in the US.
But the signs of the market downturn are clearly visible. Housing inflation is already slowing in most markets, including Germany, Australia and China.
Australia registered its first annual contraction and in the US the annual house price growth slowed to 13 per cent in August from 16 per cent in the previous month, the fastest deceleration since the index began in 1975. Capital Economics expects US house prices to fall 8 per cent from peak to trough next year.
Real estate consultancy Knight Frank reported that, at the end of the third quarter, house prices in major cities were in their second consecutive quarter of growth slowdown. Cities in New Zealand, Canada and Norway are registering double-digit contractions.
Because low stock is still supporting prices, the upcoming downturn is more visible in transactions.
In the eurozone, banks are increasingly rejecting housing loans as well as tightened conditions for those already granted. Demand for housing loans fell at the fastest pace in a decade, according to the bank lending survey for the fourth quarter. In September, new loans for house purchases were down 30 per cent from the same month last year.
Property transactions in the UK were down by an annual rate of 32 per cent in September. Housing surveyors also reported the largest fall in new buyer inquiries in October since the financial crisis, excluding the housing market shutdown during the first Covid-19 lockdown.
In the US, house sales in September dropped by an annual rate of 24 per — well below their pre-pandemic levels. Mortgage applications fell to their lowest level in 25 years in the US.
The US housing market is “evaporating,” says Mark Zandi, chief economist of Moody’s Analytics. Paul Ashworth, chief US economist at Capital Economics, echoes this view, saying housing activity “has been absolutely decimated.”
Figures for Toronto are even more dramatic. The Canadian city reported a 96 per cent nosedive in single family home sales and an 89 per cent fall for condos.
Learning lessons from the past
Not all countries, however, share the same risk of a housing downturn.
In Canada, New Zealand and Australia, for example, an acceleration in prices over the past few years, coupled with the large proportion of households with a mortgage and high levels of debt make the housing market particularly risky.
Sweden and the UK are raising alarm bells because of their reliance on floating or short-term mortgage rates.
Yulia Zhestkova, economist at Goldman Sachs, says that of the world’s largest economies she sees a “greater risk of a meaningful rise in mortgage delinquency rates in the UK.” Similarly, in the US, the fast pace of the past housing inflation, coupled with high valuations and aggressive monetary tightening, are sources of risks.
Yet other countries, including Japan, Italy and France, are better positioned, according to Oxford Economics, thanks to more modest price rises, less elevated valuations, and lower levels of household debt.
France and Italy also have quite low shares of floating-rate debt, implying some insulation from the immediate impact of rising mortgage rates.
It is not clear yet how severe any crash might be. Globally, analysts are optimistic that in most large economies, the conditions of the property market do not suggest as deep a downturn as that experienced during the financial crisis.
Back then, house prices among the most industrialised countries fell by 13 per cent from the peak in 2007 to the lowest point in 2012.
The crisis resulted in more than 2mn foreclosures in 2009 in the US. In countries such as Greece, Italy and Spain, which also suffered housing and sovereign crisis, the housing crash was so significant that prices are not yet back to where they were in 2007.
A key difference now is the strength of the labour market. Unemployment is not going to be as severe as it was in the wake of the financial crisis. The IMF forecasts the rate of joblessness to increase by less than 1 percentage point next year, compared to financial crash when it was closer to 3 percentage points.
“While unemployment remains low, there is a reasonable chance that price downturns could be limited, with markets instead ‘freezing’ at low levels of transactions,” says Slater, of Oxford Economics.
There’s also another crucial difference this time around: in many markets, including the US, the UK, South Africa, Spain and Denmark, households have lower mortgage debt relative to income than they had before the financial crisis.
Borrowers are also better protected by longer-term contracts and mortgage lending is more tightly regulated.
Across Europe, the share of mortgages on floating rates has declined sharply over the past decade, and mortgage deals for 10 years or more have become the norm. This is particularly true of Germany, the Netherlands and Spain.
Alexia Koreas, associate director at the rating company Fitch, says that in the Netherlands the lower loan-to-value ratios and substantially lower shares of interest-only mortgages “will help to avert the large price declines” seen after the financial crisis.
Tom Bill, head of UK residential research at Knight Frank, says he expects UK prices to revert to where they were in the summer of 2021, but because of low unemployment and well-capitalised banks “the sort of double-digit price declines seen during the global financial crisis” won’t be repeated.
Similarly, in the US, most mortgages are long-term deals and more than two-thirds of buyers are prime borrowers, compared with only one in four before the financial crisis.
Coupled with a very tight supply, Zandi, of Moody’s Analytics, doesn’t expect the same fall in prices and the rise in foreclosures as during the financial crisis in the US, and suggests institutional investors attracted by high rents will also support demand long-term. They “have stepped to the sidelines [for now] because they know prices are going to decline, but they won’t wait forever,” he adds.
All the signs suggest that the surge in housing demand underpinned by low interest is a thing of the past.
The market “is softening around the world,” says Cristina Arbelaez, global economist at Morgan Stanley.
“We are now starting to see a reversal” of last year’s housing boom, she warns. “But to be clear, we do not expect a repeat of the 2006-2008 housing collapse.”
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