From Toronto to Auckland, property markets are slowing
Advanced economies left interest rates too low for too long and are now scrambling to make up for lost time. The rapidly rising rates are slowing the inflation they created and the world economy as well. This will have a big impact on interest sensitive areas like real estate to see the impact first. “The pandemic-induced housing boom appears to be cooling,” notes GS. “From Toronto to Auckland, a slowdown in the housing market is underway as interest rates in developed economies are set to rise quickly.” Rising mortgage rates in the US, Canada, UK and New Zealand have already started to dampen home sales. The US has seen a whopping 40% drop, according to the financial firm’s research team. Higher interest rates are in the works and this is expected to slow down housing even more.
A global housing downturn is ‘a real risk’ Canada will lead the recession
Declining home sales tend to lead to lower home prices, but not all parties have gotten the memo. House prices continue to rise in the US, Germany and the UK. Researchers expect prices to begin falling in the not-too-distant future. A study conducted by the bank found a 10% or more drop in US home sales, resulting in falling prices 6 months later. If home sales are falling much faster than inventory, this problem could be even worse. They also report that house prices have already started to fall in Canada, Australia, New Zealand and Sweden. “In Canada, home prices have declined the most in areas that had the most growth at the beginning of the pandemic,” the bank notes to investors. They expect a modest peak decline in house prices over the next two years. Canada is projected to see the largest decline with real home prices falling 12%. It is followed by France with a drop of 9% and the USA with only 3%. These are national prices, so inflated markets appear to see larger declines. “The slowdown will be sharper in Canada due to weak recent momentum, low affordability and rapid policy increases by the Bank of Canada,” the bank said. Global economic growth is forecast to slow in the coming quarters, with home sales boosting the outlook. “And while a tight housing market may be enough to stave off a recession, the rapid deterioration in affordability and large declines in home sales suggest that a housing downturn is a real risk.”
Canada has the worst housing affordability of the advanced economies
The lack of affordability is what will keep buyers from jumping in until home prices come down. The GS Housing Affordability Index (HAI) examines the ability of households to service mortgage loans. We can see a brief increase in affordability at the beginning of the pandemic, as prices initially fell. Affordability is then quickly eroded as the market adjusts to absorb the increased credit capacity. That’s a problem the Bank of Canada has cited, warning that low interest rates don’t improve affordability. Shortly after interest rates rose, affordability fell even further—a typical but temporary phenomenon. Just as low interest rates worked to stimulate demand and raise prices, higher interest rates do the opposite. By slowing demand, prices may drop to more reasonable levels, but it takes a few months to adjust. Once again, the US has yet to see this, but it is expected in the coming months. GS is not alone in seeing inflated house prices correcting after interest rates normalize. The Bank for International Settlements (BIS) recently warned that low interest rates have caused housing bubbles in advanced economies. While they argue that it is a global phenomenon, they say it is due to monetary policy errors that are repeated in many advanced economies. They suggest that higher rates can be painful, but not addressing the problem can make it worse. If the trend is not right, the BIS warns that the effects will be beyond the housing market.
