Our Opinion: 2022
Global House Prices are Falling
Central Banks are raising interest rates. US mortgage rates have topped 7% for the first time since 2002, while rates in the EU and UK have more than doubled since last year. This is the most worrying housing market outlook for almost fifteen years.
The results are already apparent, with house prices falling in more than half of the 18 advanced economies that Oxford Economics tracks, including the UK, Germany, Sweden, Australia and Canada. The decisive factor in determining the severity of this downturn will be unemployment, as rising joblessness increases the proportion of forced sellers. In an ideal world, you get a bit of froth blown off the top of house prices during a downturn, where they are over-priced. Sometimes, housing downturns come with nastier consequences including price drops of around 15%-20% in some markets.
Statistically, the safest place to own a property may be Italy. Only 10% of households have a mortgage and many people inherit their homes. Higher interest rates and higher unemployment is likely to have a negligible effect on Italian property.
Oxford Economics thinks that Britain’s peak-to-trough house price decline will be around 13% over the next two years. Some markets are in line for steeper falls. Canadian prices rose by 56% between the end of 2019 and summer this year, while Dutch prices rose by 39%, leaving ample downside. British prices rose by just 22% in the same period.
Australia, Canada and Sweden, all of whom escaped from the global financial crisis relatively unscathed, are heading for a reckoning. Households have no recent memory of a house price crash, which has helped debt levels soar, hitting 202% as a share of disposable income in Australia and 203% in Sweden, double the level in many other places. Australia’s central bank forecasts a 20% fall in house prices, which would be the biggest decline in four decades. Thankfully, banks look better prepared for a property slump than in 2007-2009. The Bank of England has stress-tested various scenarios and thinks that British lenders would be able to cope with a (very unlikely) 33% fall in house prices and a rise in the unemployment rate from 3.5% to 12%.
A global housing slump will still do economic harm. Falling house prices prompt banks to tighten lending standards, which hurts business. It also causes a drop in housebuilding, which is a significant part of the economy in many places. Lower house prices make homeowners feel poorer, which hurts consumer confidence. In a country like the UK, where many homeowners have short-term fixed or variable mortgages, the market’s sensitivity to interest rates could also force the Bank of England to stop raising interest rates before inflation is fully crushed, sowing the seeds of longer term inflation, often referred to as stagflation.
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, and we are starting to see a reversal of the recent boom. But to be clear, very few expect a repeat of the 2006-2008 housing collapse.
16th December 2022
